MBA201a: More Advanced Pricing TechniquesMulti-part tariff examplesMulti-part tariffs: summaryBerkeley Rep ticket pricingBundling example: season ticketsSlide 6Slide 7When is bundling advantageous?TakeawaysMBA201a: More Advanced Pricing TechniquesProfessor Wolfram MBA201a - Fall 2009 Page 2Multi-part tariff examples•Amusement Parks.•Costco.•Cell phones.•Bars.•Razors and Blades.•Many more…Professor Wolfram MBA201a - Fall 2009 Page 3Multi-part tariffs: summary–Firms can reduce deadweight loss by charging price close to MC  expand consumer surplus.–Firms can capture maximal profits by charging the fixed fee that extracts as much surplus as possible  recover surplus as profits for firm!–So, why aren’t more goods sold with at least a two-part tariff?Professor Wolfram MBA201a - Fall 2009 Page 4Berkeley Rep ticket pricing–If you like theatre, you could see the following performances this season at the Berkeley Rep:•American Idiot, Tiny Kushner, Aurelia’s Oratorio, Coming Home, Concerning Strange Devices from the Distant West, Girlfriend, A new play written by Lisa Kron–If you want premium seats for the Saturday, 8PM show, you could buy:•Season tickets: $65 per ticket for all 7 plays ($65*7 = $455)•A la carte tickets: $71 per ticket plus $86 for American Idiot ($71x6 + $86 = $512)–Is this quantity discounting?Professor Wolfram MBA201a - Fall 2009 Page 5Bundling example: season ticketsAssume MC =0. Let’s consider some pricing strategies.Strategy 0 (simple pricing):p = 10  q = 6  Revenue = 60 p = 50  q = 5  Revenue = 250p = 80  q = 4  Revenue = 320p = 85  q = 3  Revenue = 255p = 130  q = 2  Revenue = 260p = 140  q = 1  Revenue = 140Willingness to PayAmerican Idiot Coming Home BothMusic lover $140 $80 $220Drama lover $50 $130 $180Green Day fan $85 $10 $95Professor Wolfram MBA201a - Fall 2009 Page 6Bundling example: season ticketsStrategy 1 (diff. by show): pA = 50  q = 3  Revenue = 150pA = 85  q = 2  Revenue = 170pA = 140  q = 1  Revenue = 140pC = 10  q = 3  Revenue = 30pC = 80  q = 2  Revenue = 160pC = 130  q = 1  Revenue = 130TOTAL REVENUE = 170 + 160 = 330Willingness to PayAmerican Idiot Coming Home BothMusic lover $140 $80 $220Drama lover $50 $130 $180Green Day fan $85 $10 $95Professor Wolfram MBA201a - Fall 2009 Page 7Bundling example: season ticketsStrategy 2 (bundle): pB = 95  q = 3  Revenue = 285pB = 180  q = 2  Revenue = 360pB = 220  q = 1  Revenue = 220Willingness to PayAmerican Idiot Coming Home BothMusic lover $140 $80 $220Drama lover $50 $130 $180Green Day fan $85 $10 $95Professor Wolfram MBA201a - Fall 2009 Page 8When is bundling advantageous?–When we sell separately, two things happen:•We give people extra consumer surplus: the music lover was able to buy a ticket to American Idiot for $85 when he values it at $140 (called “rents”).•We can generate deadweight loss (not apparent in this case).–What does bundling do?•We generate goods (the bundle) for which many people have a high willingness to pay.–BOTTOM LINE: Bundling can help extract surplus if consumers value both products and if they are heterogeneous in what they prefer most.Professor Wolfram MBA201a - Fall 2009 Page 9Takeaways–With all advanced pricing strategies, firms succeed by generating as much consumer surplus as possible, –…and then find the pricing mechanism to capture it.–Pay attention to:•Opportunities to sort consumers based on exogenous characteristics.•Opportunities to offer consumers different menus (simple- or multi-part), even if it involves defining a whole new product.•Whether your consumers’ tastes are heterogeneous or