Selling and pricing strategies Versioning Quantity discrimination Quantity discrimination Bundling Renting

Versioning Quality discrimination

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Versioning The production of informational goods requires high fixed costs, but the costs of reproduction are generally very low.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?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?What versions should one put on the market? And at which prices?

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Examples The IBM LaserPrinter 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 IBM LaserPrinter 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";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.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;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.The airplane tickets requiring one Saturday night are less expensive. Other examples?.Other examples?.

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Numerical example A good produced by a firm with various possible qualities;A good produced by a firm with various possible 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 preferences for quality;2 consumers (a guy, a girl) each one having different 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

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Numerical example The numbers Willingness to pay Quality 1 Quality 2 Quality 3 Jane20$13$8$ John12$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.

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Numerical example Calcul des profits JaneJohnProfit P1=20,20020 P1=12, P1=20, P2= P1=17, P2= P1=18, P3= Willingness to pay quality 1 quality 2 quality 3 Jane20$13$8$ John12$10$6$

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Willingness to pay quality 1 quality 2 quality 3 Jane20$14$(+1)5$(-1) John13$(+1)10$6$ JaneJohnProfitP1=20,20020 P1=13, P2= P1=17, P2= P1=16, P2= P1=20, P3=

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Quality discrimination : Conclusion It can be advantageous to produce a quality lower even if it is less expensive to produce.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 :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;

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Strategies How to create different qualities: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

Non-linear pricing Quantity discrimination

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

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

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

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

« Bundling » Joint sale of products

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Bundled goods The informational goods are often sold bundled.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.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?Why? What are the advantages of selling 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?

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

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal 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 preferences for the goods;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.The firm chooses the prices of the goods and the prices of the bundle. The model’s structure Numerical example

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal The numbers Willingness to pay Good 1 Good 2 Goods 1+2 Jane20$13$33$ John12$20$32$ Should the two goods be sold separately or bundled.

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Numerical Example Calcul des profits JaneJohnProfit P1=20,P2= P1=20, P2= P1=12, P2= P1=12, P2= P(1+2)= Willingness to pay Good 1 Good 2 Goods 1+2 Jane20$13$33$ John12$20$32$

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Willingness to pay Good 1 Good 2 Goods 1+2 Jane22$13$35$ John9$15$24$ JaneJohnProfitP1=22,P2= P1=22, P2= P1=9, P2= P(1+2)= P(1+2)=35, P2=

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Willingness to pay Good 1 Good 2 Goods 1+2 Jane22$13$35$ John9$12$21$ JaneJohnProfitP1=22,P2= P1=22, P2= P1=9, P2= P(1+2)= P(1+2)=34, P2=

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal 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.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.

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Links and further readings 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 200K].Bakos, Y. and Bryniolfsson, E.: "Bundling and Competition on the Internet: Aggregation Strategies for Information Goods," Marketing Science (January 2000). [Acrobat PDF file 200K].Acrobat PDF file 200KAcrobat PDF file 200K Bakos, Y. and Bryniolfsson, E.: "Bundling Information Goods: Pricing, Profits and Efficiency," Management Science (December 1999) [Acrobat PDF file 240K]. Winner of the 1999 J.D.C. Little Award for Best Marketing Paper published in an INFORMS journal.Bakos, Y. and Bryniolfsson, E.: "Bundling Information Goods: Pricing, Profits and Efficiency," Management Science (December 1999) [Acrobat PDF file 240K]. Winner of the 1999 J.D.C. Little Award for Best Marketing Paper published in an INFORMS journal.Acrobat PDF file 240KAcrobat PDF file 240K Chuang, J. & M. Sirbu, "Optimal Bundling Strategy for Digital Information Goods: Network Delivery of Articles and Subscriptions." Information Economics and Policy 11(2): (1999).Chuang, J. & M. Sirbu, "Optimal Bundling Strategy for Digital Information Goods: Network Delivery of Articles and Subscriptions." Information Economics and Policy 11(2): (1999).

Renting or sharing VS selling.

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

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Examples Libraries, book clubs,Libraries, book clubs, Video storesVideo stores Clubs of softwareClubs of software Resale marketsResale markets

HEC MONTRÉAL – MBA IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal For example, suppose that there are 6 consumers with willingness to pay given by [9,8,7,6,5,4].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.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, 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 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),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.Illustrating that it is the minimum willingness to pay in the marginal club that determines the price. Numerical example