Selling and pricing strategies Versioning Quantity discrimination Bundling

Selling and pricing strategies Versioning Quantity discrimination Bundling Renting

Versioning Quality discrimination

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Versioning • The production of informational goods requires high fixed costs, but the costs of reproduction are generally very low. • When an advanced version of an informational good exists, it is not less expensive to produce less powerful versions. Nevertheless several versions are marketed. Why? • What versions should one put on the market? And at which prices? Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Examples • The IBM Laser. Printer series E prints 5 pages per minutes rather than the 10 pages per minute of the standard model. A chip was introduced there to force the printer to wait; • The editors delay the publication of the books in "paperback" for months after the publications of the “clothback"; • Films shown first in theatres before been released in video or DVD. • PAWWS Financial Network sells a subscription of stock exchange data with 20 minutes of deadline for 8, 95$ per month. Subscription for data in real times is 50$ per month; • The airplane tickets requiring one Saturday night are less expensive. • Other examples? . Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Numerical example The model’s structure • A good produced by a firm with various possible qualities; • The cost is null, independently of quality; • 2 consumers (a guy, a girl) each one having different preferences for quality; • The firm chooses the qualities marketing and the prices. Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Numerical example The numbers Willingness to pay Quality 1 Quality 2 Quality 3 Jane 20$ 13$ 8$ John 12$ 10$ 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. Jacques Robert & Jean Talbot, HEC Montréal

Willingness to pay HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce quality 1 quality 2 quality Numerical example 3 Calcul des profits Jane 20$ 13$ 8$ John 10$ 6$ 12$ Jane John Profit P 1=20, 20 0 20 P 1=12, 12 12 24 P 1=20, P 2=10 10 10 20 P 1=17, P 2=10 17 10 27 P 1=18, P 3=6 18 6 24 Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Willingness to pay quality 1 quality 2 quality 3 Jane 20$ 14$(+1) 5$(-1) John 13$(+1) 10$ 6$ Jane John Profit P 1=20, 20 0 20 P 1=13, P 2=13 13 13 26 P 1=17, P 2=10 10 10 20 P 1=16, P 2=10 16 10 26 P 1=20, P 3=6 20 6 26 Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Quality discrimination : Conclusion • It can be advantageous to produce a quality lower even if it is less expensive to produce. • It is necessary to propose a price structure which respects the self-selection constraints : – Those which are ready to pay for the high quality must find it beneficial to buy this quality; – If one wishes to sell to the others, it is necessary is to lower the price of high the quality or to offer a lower quality to the others; Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Strategies • How to create different qualities: – Time and safety of delivery – Possibilities of guaranteed update, – priority access to the technical support, – Various functionalities and variable performances – Licenses limited in time Jacques Robert & Jean Talbot, HEC Montréal

Non-linear pricing Quantity discrimination

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Non-linear pricing • Quantity discrimination: the price paid per unit depends on the purchased quantity. • Examples: – – – Licences of groups Non-linear fees for financial transactions Pricing of electricity Pricing of long-distance calls / mobile phones Bonus for "frequent flyer“ “Quick. Tax", personal version and professional version. Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Conditions allowing non-linear pricing • Presence of market power or economy of scale. • Absence of resale markets • Capacity of measuring quantities purchased. Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Different types of tariffs $ Spending Three-tier Linear Two-tier Fixed rate Blocks quantity Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Optional pricing (self-selection) $ Spending Self-selection occurs when agents can choose the tariff which are appropriate to them given their needs. quantity Jacques Robert & Jean Talbot, HEC Montréal

« Bundling » Joint sale of products

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Bundled goods • The informational goods are often sold bundled. • A newspaper or a magazine contains several jointly sold sections or articles. This is the case for many other examples. • Why? What are the advantages of selling products bundled? • In which cases is this advantageous? • Is the bundled offer compulsory or optional? Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Bundled goods: examples • Compulsory bundles – – A newspaper Subscription to cable Internet Microsoft explorer and other software with Windows with a computer • Optional bundles – Tickets of season – Windows Office – Subscription to the newspapers and magazines Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Numerical example The model’s structure • • • Two goods produced by a firm; The production cost of the goods is null; 2 consumers (a guy, a girl) each one having preferences for the goods; • The firm chooses the prices of the goods and the prices of the bundle. Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce The numbers Willingness to pay Good 1 Good 2 Goods 1+2 Jane 20$ 13$ 33$ John 12$ 20$ 32$ Should the two goods be sold separately or bundled. Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Willingness to pay Calcul des profits Good 1 Numerical Example Good 2 Goods 1+2 Jane 20$ 13$ 33$ John 12$ 20$ 32$ Jane John Profit P 1=20, P 2=20 20 20 40 P 1=20, P 2=13 33 20 53 P 1=12, P 2=20 20 32 52 P 1=12, P 2=13 25 25 50 P(1+2)=32 32 32 64 Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Willingness to pay Good 1 Good 2 Goods 1+2 Jane 22$ 13$ 35$ John 9$ 15$ 24$ Jane John Profit P 1=22, P 2=15 22 15 37 P 1=22, P 2=13 35 13 48 P 1=9, P 2=13 22 22 44 P(1+2)=24 24 24 48 P(1+2)=35, P 2=15 35 15 50 Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Willingness to pay Good 1 Good 2 Goods 1+2 Jane 22$ 13$ 35$ John 9$ 12$ 21$ Jane John Profit P 1=22, P 2=13 35 0 35 P 1=22, P 2=12 34 12 46 P 1=9, P 2=12 21 21 42 P(1+2)=21 21 21 42 P(1+2)=34, P 2=12 34 12 46 Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Conclusion • It may be advantageous to sell jointly two or several goods; in particular, when the willingness to pay for these goods are negatively correlated between the individuals. Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Links and further readings • • • Bakos, Y. and Bryniolfsson, E. : "Bundling and Competition on the Internet: Aggregation Strategies for Information Goods, " Marketing Science (January 2000). [Acrobat PDF file 200 K]. Bakos, Y. and Bryniolfsson, E. : "Bundling Information Goods: Pricing, Profits and Efficiency, " Management Science (December 1999) [Acrobat PDF file 240 K]. Winner of the 1999 J. D. C. Little Award for Best Marketing Paper published in an INFORMS journal. 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). Jacques Robert & Jean Talbot, HEC Montréal

Renting or sharing VS selling.

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Renting and sharing of informational goods • It can be more profitable to rent than to sell informational goods. If : 1. 2. 3. the costs of sharing goods are less than the marginal cost of production; the contents are used little once and the costs of sharing are low; this makes it possible to segment the market. Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Examples • • Libraries, book clubs, Video stores Clubs of software Resale markets Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce Numerical example • • • For example, suppose that there are 6 consumers with willingness to pay given by [9, 8, 7, 6, 5, 4]. 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)]. 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 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 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 determines the price. Jacques Robert & Jean Talbot, HEC Montréal