Selling and pricing strategies Versioning Quantity discrimination Quantity discrimination Bundling Renting.

Selling and pricing strategiesSelling and pricing strategies

VersioningVersioning

Quantity discriminationQuantity discrimination

BundlingBundling

RentingRenting


Quality discriminationQuality discrimination

HEC MONTRÉAL – MBA53-751-03 IT and E-Commerce

Jacques Robert & Jean Talbot, HEC Montréal


• The production of informational goods requires The production of informational goods requires high fixed costs, but the costs of reproduction are high fixed costs, but the costs of reproduction are generally very low. generally very low.

• When an advanced version of an informational When an advanced version of an informational good exists, it is not less expensive to produce good exists, it is not less expensive to produce less powerful versions. Nevertheless several less powerful versions. Nevertheless several versions are marketed. Why? versions are marketed. Why?

• What versions should one put on the market? What versions should one put on the market? And at which prices? And at which prices?



ExamplesExamples

• The IBM LaserPrinter series E prints 5 pages per minutes The IBM LaserPrinter series E prints 5 pages per minutes rather than the 10 pages per minute of the standard model. rather than the 10 pages per minute of the standard model. A chip was introduced there to force the printer to wait; A chip was introduced there to force the printer to wait;

• The editors delay the publication of the books in The editors delay the publication of the books in "paperback" for months after the publications of the "paperback" for months after the publications of the “clothback"; “clothback";

• Films shown first in theatres before been released in video Films shown first in theatres before been released in video or DVD. or DVD.

• PAWWS Financial Network sells a subscription of stock PAWWS Financial Network sells a subscription of stock exchange data with 20 minutes of deadline for 8,95$ per exchange data with 20 minutes of deadline for 8,95$ per month. Subscription for data in real times is 50$ per month;month. Subscription for data in real times is 50$ per month;

• The airplane tickets requiring one Saturday night are less The airplane tickets requiring one Saturday night are less expensive. expensive.

• Other examples?.Other examples?.



Numerical exampleNumerical example

• A good produced by a firm with various possible A good produced by a firm with various possible qualities;qualities;

• The cost is null, independently of quality; The cost is null, independently of quality; • 2 consumers (a guy, a girl) each one having different 2 consumers (a guy, a girl) each one having different

preferences for quality; preferences for quality; • The firm chooses the qualities marketing and the prices. The firm chooses the qualities marketing and the prices.

The model’s structure




The numbers

Willingness to payWillingness to pay

Quality 1Quality 1 Quality 2Quality 2 Quality 3Quality 3

JaneJane 20$20$ 13$13$ 8$8$

JohnJohn 12$12$ 10$10$ 6$6$

•Which qualities should be marketed and at which price, in order to maximize the firm’s profits ?

•The firm chooses the qualities marketed and the prices.




Calcul des profits

JaneJane JohnJohn Profit Profit

P1=20,P1=20, 2020 00 2020

P1=12, P1=12, 1212 1212 2424

P1=20, P2=10P1=20, P2=10 1010 1010 2020

P1=17, P2=10P1=17, P2=10 1717 1010 2727

P1=18, P3=6P1=18, P3=6 1818 66 2424


quality 1quality 1 quality 2quality 2 quality 3quality 3

JaneJane 20$20$ 13$13$ 8$8$

JohnJohn 12$12$ 10$10$ 6$6$




quality 1quality 1 quality 2quality 2 quality 3quality 3

JaneJane 20$20$ 14$(+1)14$(+1) 5$(-1)5$(-1)

JohnJohn 13$(+1)13$(+1) 10$10$ 6$6$


P1=20,P1=20, 2020 00 2020

P1=13, P2=13P1=13, P2=13 1313 1313 2626

P1=17, P2=10P1=17, P2=10 1010 1010 2020

P1=16, P2=10P1=16, P2=10 1616 1010 2626

P1=20, P3=6P1=20, P3=6 2020 66 2626



Quality discrimination :Quality discrimination : ConclusionConclusion

• It can be advantageous to produce a quality lower even It can be advantageous to produce a quality lower even if it is less expensive to produce. if it is less expensive to produce.

• It is necessary to propose a price structure which It is necessary to propose a price structure which respects the self-selection constraints : respects the self-selection constraints : – Those which are ready to pay for the high quality Those which are ready to pay for the high quality

must find it beneficial to buy this quality;must find it beneficial to buy this quality;– If one wishes to sell to the others, it is necessary is If one wishes to sell to the others, it is necessary is

to lower the price of high the quality or to offer a to lower the price of high the quality or to offer a lower quality to the others; lower quality to the others;



StrategiesStrategies• How to create different qualities: How to create different qualities:

– Time and safety of delivery Time and safety of delivery – Possibilities of guaranteed update, Possibilities of guaranteed update, – priority access to the technical support, priority access to the technical support, – Various functionalities and variable Various functionalities and variable

performances performances – Licenses limited in timeLicenses limited in time

Non-linear pricingNon-linear pricing

Quantity discriminationQuantity discrimination



Non-linear pricingNon-linear pricing

• Quantity discrimination: Quantity discrimination: the price paid per unit the price paid per unit depends on the purchased quantity. depends on the purchased quantity.

• Examples: Examples: – Licences of groupsLicences of groups– Non-linear fees for financial transactions Non-linear fees for financial transactions – Pricing of electricityPricing of electricity– Pricing of long-distance calls / mobile phonesPricing of long-distance calls / mobile phones– Bonus for "frequent flyer“Bonus for "frequent flyer“– “ “QuickTax", personal version and professional version.QuickTax", personal version and professional version.



Conditions allowing non-linear Conditions allowing non-linear pricingpricing

• Presence of market power or economy of Presence of market power or economy of scale.scale.

• Absence of resale markets Absence of resale markets

• Capacity of measuring quantities Capacity of measuring quantities purchased.purchased.



Different types of tariffsDifferent types of tariffs

quantity

Spending$

Linear

Fixed rate

Two-tier

Blocks

Three-tier



Optional pricing Optional pricing (self-selection)(self-selection)

quantity

Spending$ Self-selection occurs when Self-selection occurs when

agents can choose the tariff agents can choose the tariff which are appropriate to which are appropriate to them given their needs. them given their needs.

« Bundling »« Bundling »

Joint sale of productsJoint sale of products



Bundled goodsBundled goods

• The informational goods are often sold bundled. The informational goods are often sold bundled. • A newspaper or a magazine contains several A newspaper or a magazine contains several

jointly sold sections or articles. This is the case jointly sold sections or articles. This is the case for many other examples. for many other examples.

• Why? What are the advantages of selling Why? What are the advantages of selling products bundled?products bundled?

• In which cases is this advantageous? In which cases is this advantageous? • Is the bundled offer compulsory or optional? Is the bundled offer compulsory or optional?



Bundled goods: examplesBundled goods: examples

• Compulsory bundlesCompulsory bundles– A newspaper A newspaper – Subscription to cable Internet Subscription to cable Internet – Microsoft explorer and other software with Windows Microsoft explorer and other software with Windows – Windows with a computer Windows with a computer

• Optional bundlesOptional bundles– Tickets of season Tickets of season – Windows Office Windows Office – Subscription to the newspapers and magazines Subscription to the newspapers and magazines



• Two goods produced by a firm; Two goods produced by a firm; • The production cost of the goods is null; The production cost of the goods is null; • 2 consumers (a guy, a girl) each one having 2 consumers (a guy, a girl) each one having

preferences for the goods; preferences for the goods; • The firm chooses the prices of the goods and The firm chooses the prices of the goods and

the prices of the bundle. the prices of the bundle.

The model’s structure




The numbers


Good 1Good 1 Good 2Good 2 Goods 1+2Goods 1+2

JaneJane 20$20$ 13$13$ 33$33$

JohnJohn 12$12$ 20$20$ 32$32$

Should the two goods be sold separately or bundled.



Numerical ExampleNumerical Example

Calcul des profits


P1=20,P2=20P1=20,P2=20 2020 2020 4040

P1=20, P2=13P1=20, P2=13 3333 2020 5353

P1=12, P2=20P1=12, P2=20 2020 3232 5252

P1=12, P2=13P1=12, P2=13 2525 2525 5050

P(1+2)=32P(1+2)=32 3232 3232 6464



JaneJane 20$20$ 13$13$ 33$33$

JohnJohn 12$12$ 20$20$ 32$32$





JaneJane 22$22$ 13$13$ 35$35$

JohnJohn 9$9$ 15$15$ 24$24$


P1=22,P2=15P1=22,P2=15 2222 1515 3737

P1=22, P2=13P1=22, P2=13 3535 1313 4848

P1=9, P2=13P1=9, P2=13 2222 2222 4444

P(1+2)=24P(1+2)=24 2424 2424 4848

P(1+2)=35, P2=15P(1+2)=35, P2=15 3535 1515 5050





JaneJane 22$22$ 13$13$ 35$35$

JohnJohn 9$9$ 12$12$ 21$21$


P1=22,P2=13P1=22,P2=13 3535 00 3535

P1=22, P2=12P1=22, P2=12 3434 1212 4646

P1=9, P2=12P1=9, P2=12 2121 2121 4242

P(1+2)=21P(1+2)=21 2121 2121 4242

P(1+2)=34, P2=12P(1+2)=34, P2=12 3434 1212 4646



ConclusionConclusion

• It may be advantageous to sell jointly two or It may be advantageous to sell jointly two or several goods; in particular, when the willingness several goods; in particular, when the willingness to pay for these goods are negatively correlated to pay for these goods are negatively correlated between the individuals. between the individuals.



Links and further readingsLinks and further readings

• Bakos, Y. and Bryniolfsson, E.: "Bundling and Competition on the Internet: Aggregation Strategies Bakos, Y. and Bryniolfsson, E.: "Bundling and Competition on the Internet: Aggregation Strategies for Information Goods," for Information Goods," Marketing ScienceMarketing Science (January 2000). [ (January 2000). [Acrobat Acrobat PDF PDF file 200Kfile 200K].].

• Bakos, Y. and Bakos, Y. and Bryniolfsson, E.:Bryniolfsson, E.: "Bundling Information Goods: Pricing, Profits and Efficiency," "Bundling Information Goods: Pricing, Profits and Efficiency," Management ScienceManagement Science (December 1999) [ (December 1999) [Acrobat PDF file 240KAcrobat PDF file 240K]. Winner of the 1999 J.D.C. Little ]. Winner of the 1999 J.D.C. Little Award for Best Marketing Paper published in an INFORMS journal.Award for Best Marketing Paper published in an INFORMS journal.

• Chuang, J. & M. Sirbu, "Optimal Bundling Strategy for Digital Information Goods: Network Chuang, J. & M. Sirbu, "Optimal Bundling Strategy for Digital Information Goods: Network Delivery of Articles and Subscriptions." Information Economics and Policy 11(2):147-176 (1999). Delivery of Articles and Subscriptions." Information Economics and Policy 11(2):147-176 (1999).

Renting or sharing VS selling.Renting or sharing VS selling.



Renting and sharing of informational Renting and sharing of informational goodsgoods

• It can be more profitable to rent than to sell It can be more profitable to rent than to sell informational goods. If :informational goods. If :

1.1. the costs of sharing goods are less than the marginal the costs of sharing goods are less than the marginal cost of production;cost of production;

2.2. the contents are used little once and the costs of the contents are used little once and the costs of sharing are low;sharing are low;

3.3. this makes it possible to segment the market. this makes it possible to segment the market.



ExamplesExamples

• Libraries, book clubs, Libraries, book clubs, • Video storesVideo stores• Clubs of software Clubs of software • Resale marketsResale markets



• For example, suppose that there are 6 consumers with willingness to pay For example, suppose that there are 6 consumers with willingness to pay given by [9,8,7,6,5,4]. given by [9,8,7,6,5,4].

• If the price is set at 6, then 4 consumers will buy the product. If the price is set at 6, then 4 consumers will buy the product. • Suppose now that 3 groups of two people form, as in [(9,8), (7,6), (5,4)]. Suppose now that 3 groups of two people form, as in [(9,8), (7,6), (5,4)]. • If each person contributes the same amount towards the group purchase, If each person contributes the same amount towards the group purchase,

and transactions costs are zero, then the producer will sell to one group if it and transactions costs are zero, then the producer will sell to one group if it sets a price of 16 (= 28) and to two groups if it sets a price of 12 (= 2 6). sets a price of 16 (= 28) and to two groups if it sets a price of 12 (= 2 6).

• If the groups are [(9,6), (8,7), (5,4)] the producer will still sell to one group if If the groups are [(9,6), (8,7), (5,4)] the producer will still sell to one group if it sets a price of 14 (= 27) and two groups if it sets a price of 12 (= 26),it sets a price of 14 (= 27) and two groups if it sets a price of 12 (= 26),

• Illustrating that it is the minimum willingness to pay in the marginal club that Illustrating that it is the minimum willingness to pay in the marginal club that determines the price.determines the price.


Selling and pricing strategies Versioning Quantity discrimination Quantity discrimination Bundling Renting.

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