Marketing Tactics: Bundling, Upgrading and Dealerships Chapter 14 Bundling and Tying Organization: Markets and strategies ② Wen cao
Slides Reference: Industrial Organization: Markets and Strategies © Wen Cao Marketing Tactics : Bundling, Upgrading and Dealerships Chapter 14. Bundling and Tying
Chapter 14-Objectives Chapter 14. Learning objectives Identify the difference between bundling(mixed and pure)and tying Understand how a monopolist can use bundling and tying as a price discrimination device Analyse the effects of bundling on competition in oligopolistic markets Understand how bundling, depending on the circumstances, leads to a softer or a tougher price competition e Wen Cao
© Wen Cao 2 Chapter 14- Objectives Chapter 14. Learning objectives • Identify the difference between bundling (mixed and pure) and tying. • Understand how a monopolist can use bundling and tying as a price discrimination device. • Analyse the effects of bundling on competition in oligopolistic markets. • Understand how bundling, depending on the circumstances, leads to a softer or a tougher price competition. Chapter 14. Learning objectives • Identify the difference between bundling (mixed and pure) and tying. • Understand how a monopolist can use bundling and tying as a price discrimination device. • Analyse the effects of bundling on competition in oligopolistic markets. • Understand how bundling, depending on the circumstances, leads to a softer or a tougher price competition
Chapter 14-Introduction Selling different products in a single package e Definitions ° Bundling→> fixed proportions lvs Block Pricing] Pure bundling: only the package is available Mixed bundling: combined products are also sold separately Example: software suite Tying proportions might vary in the mix of goods EXample: printer and cartridges ● Rationa|es Strong complementarities between goods Supply side: cost efficiencies Demand side: Entry-deterrent strategy >chapter 8 Price discrimination device - what we study here e Wen Cao
© Wen Cao 3 Selling different products in a single package • Definitions • Bundling fixed proportions [VS Block Pricing] • Pure bundling: only the package is available • Mixed bundling: combined products are also sold separately • Example: software suite • Tying proportions might vary in the mix of goods • Example: printer and cartridges • Rationales • Strong complementarities between goods • Supply side: cost efficiencies • Demand side: • Entry-deterrent strategy chapter 8 • Price discrimination device what we study here. Chapter 14 - Introduction
Chapter 14-Introduction Case. Bundling in the information economy ° Content e Subscriptions to cable TV, to magazines CDs(bundle of songs ) newspapers(of articles Software: office suite, integration of various functionalities into the same software platform e Theatres forced to buy good and bad movies from the same distributor Infrastructure ° Computer systems Audio equipment (mixed bundling) Photocopier(machine maintenance Early IBM computers(machine punch-cards> tying) e Wen Cao
© Wen Cao 4 Case. Bundling in the information economy • Content • Subscriptions to cable TV, to magazines • CDs (bundle of songs), newspapers (of articles) • Software: ‘office suite’, integration of various functionalities into the same software platform • Theatres forced to buy ‘good’ and ‘bad’ movies from the same distributor • Infrastructure • Computer systems • Audio equipment (mixed bundling) • Photocopier (machine + maintenance) • Early IBM computers (machine + punch-cards tying) Case. Bundling in the information economy • Content • Subscriptions to cable TV, to magazines • CDs (bundle of songs), newspapers (of articles) • Software: ‘office suite’, integration of various functionalities into the same software platform • Theatres forced to buy ‘good’ and ‘bad’ movies from the same distributor • Infrastructure • Computer systems • Audio equipment (mixed bundling) • Photocopier (machine + maintenance) • Early IBM computers (machine + punch-cards tying) Chapter 14 - Introduction
Chapter 14-Monopoly bundling Formal analysis of monopoly bundling ° Bundling≈ menu pricing e If bundle price sum of prices of components>non linear pricing with quantity discounts Twisted form of menu pricing: set unique price for several goods to v consumer heterogeneity Illustration 2 products(produced at zero cost), 2 consumers Valuations Product 1 Product 2 Negative Consumer 1 correlation Consumer 2 32 23 But result holds more generally Separate sales: p,=p2=2, T=8 ° Bundling:p=5,T=10 e Wen Cao
© Wen Cao 5 Formal analysis of monopoly bundling • Bundling menu pricing •If bundle price < sum of prices of components non linear pricing with quantity discounts • Twisted form of menu pricing: set unique price for several goods to consumer heterogeneity • Illustration • 2 products (produced at zero cost), 2 consumers • Valuations • Separate sales: p1 p2 , • Bundling: p , Chapter 14 - Monopoly bundling Product 1 Product 2 Consumer 1 3 2 Consumer 2 2 3 Negative correlation But result holds more generally
Chapter 14-Monopoly bundling Formal analysis of monopoly bundling/Tying A More complicated Example o 2 products(produced at zero cost), 2 consumers e Valuations Product X Product Y Consumer 1 Consumer 2 430 034 Consumer 3 Separate sales: Px=py =3, Tt= 12; px=py =4, T=8 Pure Tying:p=4,兀=12;p′=6,兀=6 Mixed Tying: pMI=6& px=Py=4, T=14>12 e Wen Cao
© Wen Cao 6 Formal analysis of monopoly bundling/Tying • A More Complicated Example • 2 products (produced at zero cost), 2 consumers • Valuations • Separate sales: pX pY , pX pY , • Pure Tying: pT pT • Mixed Tying: pMT pX pY Chapter 14 - Monopoly bundling Product X Product Y Consumer 1 4 0 Consumer 2 3 3 Consumer 3 0 4
Chapter 14-Monopoly Bundling/Tying Formal analysis of monopoly bundling(cont'd e Lesson: If consumers have heterogeneous but uncorrelated valuations for 2 products, then the monopolist t its profits under pure bundling compared to separate selling It T its demand by selling the bundle cheaper than the combined price under separate selling Lesson: Mixed bundling allows the monopolist to increase its profits even further than pure bundling Here bundle is more expensive than under pure bundling and individual components are more expensive than under separate selling Mixed tying may yield strictly higher profit levels than pure tying and no tying. But NOT always e Wen Cao
© Wen Cao 7 Formal analysis of monopoly bundling (cont’d) Chapter 14 - Monopoly Bundling/Tying • Lesson: If consumers have heterogeneous but uncorrelated valuations for 2 products, then the monopolist its profits under pure bundling compared to separate selling. It its demand by selling the bundle cheaper than the combined price under separate selling. • Lesson: If consumers have heterogeneous but uncorrelated valuations for 2 products, then the monopolist its profits under pure bundling compared to separate selling. It its demand by selling the bundle cheaper than the combined price under separate selling. • Lesson: Mixed bundling allows the monopolist to increase its profits even further than pure bundling. Here, bundle is more expensive than under pure bundling and individual components are more expensive than under separate selling. • Lesson: Mixed bundling allows the monopolist to increase its profits even further than pure bundling. Here, bundle is more expensive than under pure bundling and individual components are more expensive than under separate selling. Mixed tying may yield strictly higher profit levels than pure tying and no tying. But NOT always
Chapter 11- Tying Case. Popcorn in movie theatres Why does popcorn cost so much at the movies? Theatres optimally choose to shift profits from admission tickets to concessions because they can meter the surplus extracted from a customer by how much of the aftermarket good they demand If true, positive correlation between willingness to pay for movies and demand for concessions Hartmann and Gil(2008)confirms this conjecture by analysing a data set with approximately 5 years of weekly attendance, box office revenue and concession revenue for a chain of 43 Spanish movie theatres e Wen Cao
© Wen Cao 8 Case. Popcorn in movie theatres • Why does popcorn cost so much at the movies? • Theatres optimally choose to shift profits from admission tickets to concessions because they can ‘meter’ the surplus extracted from a customer by how much of the aftermarket good they demand. •If true, positive correlation between willingness to pay for movies and demand for concessions. • Hartmann and Gil (2008) confirms this conjecture by analysing a data set with approximately 5 years of weekly attendance, box office revenue and concession revenue for a chain of 43 Spanish movie theatres. Case. Popcorn in movie theatres • Why does popcorn cost so much at the movies? • Theatres optimally choose to shift profits from admission tickets to concessions because they can ‘meter’ the surplus extracted from a customer by how much of the aftermarket good they demand. •If true, positive correlation between willingness to pay for movies and demand for concessions. • Hartmann and Gil (2008) confirms this conjecture by analysing a data set with approximately 5 years of weekly attendance, box office revenue and concession revenue for a chain of 43 Spanish movie theatres. Chapter 11 - Tying
Chapter 14-Competitive bundling/Tying Tying and Foreclosure Bundling is often used by competing firms ● Motivation? ° Entry deterrence→> analyzed in Chapter8 Two firms: produce computers, X andY One firm produces monitor, Z(compatible with X&Y) e Two types of consumers 3-Px -pz buys X and Z Ui= 1-PY-PZ busy and z Otherwise 1-Px-Pz buys X and Z U= 3-PY-pz buys Y and 2 Three independent firms 2 兀x=兀y= 2 (px,py,Pz)=(1,1,2),(0,0,3)and(3,3.0)
Tying and Foreclosure • Bundling is often used by competing firms. • Motivation? • Entry deterrence analyzed in Chapter 8 • Two firms: produce computers, X and Y • One firm produces monitor, Z (compatible with X&Y) • Two types of consumers: • Three independent firms: p X p Y 2, p Z =1; X Y Z =2 (p X p Y , p Z )=(1,1,2), (0,0, 3) and (3,3,0) © Wen Cao 9 Chapter 14 - Competitive bundling/Tying
Chapter 14-Competitive bundling/Tying When bundling toughtens price competition e firm x takes over firm Z pxz=3, No one wants a computer with no monitor, so firm Y will be out of business. (py =0) Tying can serve as a tool for foreclosing a competing firm However, xz =3<2+2. So foreclosure is not profitable for the tying firm e Wen Cao
© Wen Cao 10 When bundling toughtens price competition • Firm X takes over firm Z • pXZ 3, No one wants a computer with no monitor, so firm Y will be out of business. ( pY =0) • Tying can serve as a tool for foreclosing a competing firm. • However, XZ =3<2+2. So foreclosure is not profitable for the tying firm. Chapter 14 - Competitive bundling/Tying