1. MBA201a: More Advanced Pricing Techniques

2. Professor WolframMBA201a - Fall 2009 Page 1 Multi-part tariff examples Amusement Parks. Costco. Cell phones. Bars. Razors and Blades. Many more…

3. Professor WolframMBA201a - Fall 2009 Page 2 Multi-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?

4. Professor WolframMBA201a - Fall 2009 Page 3 Berkeley 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?

5. Professor WolframMBA201a - Fall 2009 Page 4 Bundling example: season tickets Assume MC =0. Let’s consider some pricing strategies. Strategy 0 (simple pricing):p = 10  q = 6  Revenue = 60 p = 50  q = 5  Revenue = 250 p = 80  q = 4  Revenue = 320 p = 85  q = 3  Revenue = 255 p = 130  q = 2  Revenue = 260 p = 140  q = 1  Revenue = 140 Willingness to Pay American IdiotComing HomeBoth Music lover$140$80$220 Drama lover$50$130$180 Green Day fan$85$10$95

6. Professor WolframMBA201a - Fall 2009 Page 5 Bundling example: season tickets Strategy 1 (diff. by show):p A = 50  q = 3  Revenue = 150 p A = 85  q = 2  Revenue = 170 p A = 140  q = 1  Revenue = 140 p C = 10  q = 3  Revenue = 30 p C = 80  q = 2  Revenue = 160 p C = 130  q = 1  Revenue = 130 TOTAL REVENUE = 170 + 160 = 330 Willingness to Pay American IdiotComing HomeBoth Music lover$140$80$220 Drama lover$50$130$180 Green Day fan$85$10$95

7. Professor WolframMBA201a - Fall 2009 Page 6 Bundling example: season tickets Strategy 2 (bundle):p B = 95  q = 3  Revenue = 285 p B = 180  q = 2  Revenue = 360 p B = 220  q = 1  Revenue = 220 Willingness to Pay American IdiotComing HomeBoth Music lover$140$80$220 Drama lover$50$130$180 Green Day fan$85$10$95

8. Professor WolframMBA201a - Fall 2009 Page 7 When 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.

9. Professor WolframMBA201a - Fall 2009 Page 8 Takeaways –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 homogeneous.