Bundle pricing of congested services

Bundle pricing is commonly adopted by service firms managing multiple congestion-prone service facilities. Under bundle pricing, the firm charges a single price for all the services as a whole, and customers either purchase the bundle or do not purchase at all. This scheme is in contrast to a la carte pricing, under which the firm sets a separate price for each service, and customers can choose which service to purchase, if any. The existing theory generally sees bundle pricing as more lucrative, especially when customers' valuations for different services are negatively dependent, pointing to bundling's ability to reduce customer valuation dispersion and thus enable surplus extraction. However, despite its prevalence in practice, little is known about bundle pricing in service systems that involve congestion-driven delay. We find that the prescriptive guidelines from the existing theory can be reversed in such congested service settings. Specifically, bundling fails to make more revenue than a la carte pricing when the market size is large or customers are highly delay-sensitive, regardless of whether customer valuations are independent or negatively dependent across services. Moreover, negative dependence of customer valuations may even further decrease bundling revenue.

Product bundling and pricing strategies can be effectively deployed to reduce the firm’s fixed complexity costs in product development, sourcing, manufacturing and distribution logistics and to raise consumer prices. In addition, the introduction of new and innovative product features may allow firms to raise both expected sales and consumer surplus, consumer satisfaction respectively, measured by the difference between the customers reservation price and the respective market price of the product. In general, when customer segments are very heterogeneous, then a mixed bundling or mass-customization strategy may dominate a free-choice or pure bundling strategy in terms of expected sales. This is due to the fact that the structure of micro-markets can be directly exploited. Contrary, the two other strategies can be viewed as mass production strategies, since they can not effectively exploit the willingness-to-pay of attractive micro-markets. Development of new and innovative product features can create a real option value for the firm, since it enables it to capture additional markets or market share. Utilizing a real options approach for (incremental) product development, we show that the firm’s downside risk can be curtailed due to the option to abandon the project. In general, the benefit of introducing new product features must be traded off against the possibility of market reactions by competitors and the development costs and improvement costs prior to market launch.In this paper, we analyze the firm’s option to introduce a mixed product bundle for mass customization as opposed to a free-choice or pure product bundle policy for mass production. Moreover, the introduction of the new product can be abandoned contingent on both market and project information. In addition, the firm has the option to improve the project periodically, i.e., take corrective action in order to influence the project’s expected payoffs. We show that the option value of the project under consideration can be significantly increased this way and that the decision on the optimal product policy and pricing strategy should be postponed until (close to) the time of market entry.

Bundling, product choice, and efficiency: Should cable television networks be offered à la carte?

Bundling, à la carte pricing and vertical bargaining in a two-sided model

We develop a two-sided market model with an upstream-downstream structure. More specifically, the platform consists of two rival upstream firms and a downstream monopolist. Each upstream firm negotiates the input price (license fee) with the downstream monopolist and also chooses the amount of advertising that is embedded in the good it sells to the downstream monopolist. The downstream monopolist can offer the two goods either on an a la carte basis or as a bundle. We use this model to understand the incentives to bundle and the welfare properties of bundling in a two-sided market framework. We also contribute to the ongoing debate on a la carte pricing in the TV industry, where the two upstream firms can be viewed as two rival TV networks and the downstream monopolist as a cable operator. We show that an a la carte regulation will raise consumer surplus and downstream profit, while it will decrease the profits of the upstream TV networks.

We organize the existing theoretical pricing research into a new two-level framework for industrial goods pricing. The first level consists of four pricing situations: New Product, Competitive, Product Line, and Cost-based. The second level consists of the pricing strategies appropriate for a given situation. For example, within the new product pricing situation, there are three alternative pricing strategies: Skim, Penetration, and Experience Curve pricing. There are a total of ten pricing strategies included in the framework. We then identified a set of cost, product, market, and information conditions which determine what pricing situation(s) a firm is facing as well as which strategies are appropriate within a given situation. Some of these determinant conditions are common to many pricing strategies (e.g., highly elastic demand) while others are unique to a given strategy within a particular pricing situation. For example, within the product line situation, the profitability of supplementary sales is a unique determinant of the Complementary Product pricing strategy (razor-and-blade pricing). Using this framework as a basis for an empirical study, we examined how well current industrial pricing practice matches the prescriptions from the existing research. Our sample consisted of 270 respondents (27% response rate). Of these, more than 50% indicated that they used more than one pricing strategy in formulating their most recent pricing decision for a high-value industrial product sold in the United States. As in previous research, Cost-Plus pricing was the most often cited pricing strategy (56% of the respondents). Since the respondents were able to indicate their use of more than one pricing strategy, the data are of the “pick k from n” variety. In order to model the managers' pricing strategy choices, we constructed a “stacked” binary logit with a separate observation for each strategy within a given pricing situation. The signs of the determinant variables were estimated as interaction terms. The new product pricing strategies (skim, penetration, experience curve) were used for new models in the market. Skim pricing was used in markets with high levels of product differentiation by firms at a cost disadvantage due to scale. Penetration pricing was used by firms with a cost advantage due to scale in markets with high level of overall elasticity but low brand elasticity. Experience curve pricing was used for minor innovations by firms with low capacity utilization in markets with a high level of differentiation. The competitive pricing strategies (Leader, Parity, and Low-price Supplier) were used in mature markets. Parity pricing was used by firms in a poor competitive situation, i.e., high costs, low market share, low product differentiation. These firms were also unable to take advantage of high levels of elasticity since their capacity utilization was high. In contrast, the low-price supplier strategy was used by firms with low costs due to scale advantages. Since they have low utilization, these firms can take advantage of elastic brand demand. None of the determinants were significantly related to the choice of leader pricing. Product line pricing strategies (Bundling, Complementary Product, and Customer Value pricing) were more likely to be used by firms which sell substitute or complementary products. Bundle pricing was used for per-sale/contract pricing in markets with high levels of brand elasticity. Complementary product pricing (razor-and-blade) was used by firms that enjoyed high profitability on its supplementary sales. Using customer value pricing, a firm offers a stripped down version of its current products to appeal to more price sensitive segments or to leverage new distribution channels. This strategy was used to target a narrow segment in high growth markets where price changes are difficult to detect. Cost-based pricing was more likely to be used in markets where demand is very difficult to estimate. In such a situation, cost-based pricing makes a great deal of sense. In general, the results show that the managers' pricing strategy choices are consistent with normative pricing research. However, questions about how managers combine their strategies to arrive at a final price as well as the organizational influences on pricing strategies remain important areas for future research.

The analysis of the putative effect of proposed mergers of mobile telecommunications operators has reached unprecedented levels of complexity, typically now running into hundreds of pages whereas in 2007 the European Commission was able to approve a 4-to-3 merger in The Netherlands on the basis of 18 pages of analysis. At the heart of this analysis is the structure of the industry, based on the number of firms. This paper takes a new approach in which we explicitly focus on the fact that for mobile operators today, the main product (with the possible exception of the handset subsidy) is data bundles. In the presence of heterogeneous consumer valuations, firms choose bundle sizes and prices. The structural focus of our analysis is the effect of the number and range of bundles offered, in addition to the number of firms, on form profits and consumer surplus. Future work will incorporate the dimension of time as in practice data bundles with various periods of validity are offered in the market. We construct a discrete model in which optimal pricing strategies for firms are determined in a Stackelberg-type competition model. There are finitely many consumers and finitely many firms. Firms determine their quasi-optimal pricing strategy in sequence by using simulation to each select a fixed number of bundles of a single product to offer. Bundles differ in their price and size. There is assumed to be no product differentiation among the firms and consumers have randomized willingness to pay and select their optimal purchase(s) by maximizing their individual consumer surplus. Some customers may choose to purchase nothing at all. First, we select distributions for the firms' choices and for the consumer valuations that allow for outcomes that are typically observed in an oligopoly market like mobile network data. The finite number of consumers can be thought of discrete groups of types of consumers. This is not entirely dissimilar to the user baskets often used (low, moderate and high volume users) in merger analysis. Second, we investigate the effect on consumer and total welfare of a change in the number of firms using our Monte Carlo simulation. Prices and quantities as well as customer valuations are discrete variables and we purposely eschew an attempt to find an analytical solution. The model builds on models where a single firm determines bundling prices and strategies (e.g. Spence, 1980; Schmalensee, 1984; Hitt and Chen, 2005;, Wu et al., 2018; Ye, et al., 2019; Bucarey, et al, 2021), by incorporating competitive interaction (e.g. Mantovani and Vanderkerckhove, 2016). The novelty of our model is the ability to calibrate it to provide insights across a wide range of distributions of customer willingness-to-pay, other consumer preference characteristics and market structures (number of firms). The model is informative for both competition authorities assessing merger proposals, and for firms engaged in cardinality bundle pricing or contemplating market entry. A key finding is that in this model, a reduction of the number of firms from 4 to 3 has no effect on consumer surplus. We also see that when the model runs with 4 firms, it quite often happens that an equilibrium state is reached where one of the firms fails to make any sales at all. This was not observer in the case of 3 firms.

The paper aims to find out if there is a difference in the pricing strategies in online and offline environments as well as to establish the most common pricing strategies used by companies in a digital environment. With this regard, online research has been carried out of executive directors/managers/experts in 150 companies that provide services in three product categories: digital products; non-digital products sold both offline and online or online only; and digitalised services in addition to traditional offers. It is established that for the majority of the companies that sell both offline and online there is no difference in the pricing strategies used. The most common pricing strategy applied in a digital environment according to the adopted revenue model is dynamic pricing, of the product mix pricing strategies – bundle pricing, and according to the payment method – rebate systems.

Product and price bundling are two distinct strategies, but both involve the sale of two or more products in a single package. They differ on their underlying economic rationales and customer value propositions. Extant literature has studied the optimality of the strategies based almost exclusively on economic criteria. This study complements the literature by investigating optimality based on consumers' subjective evaluations. Two factorial experiments are conducted to study how marketers can influence consumers' preferences between a product and price bundle in an efficient choice set by manipulating the choice context. Results suggest that reference and price framing shift preferences in favor of the product bundle, and the two framing effects interact synergistically. Individual goal orientation (prevention versus promotion) moderates framing effects. Findings also suggest that product bundling can be an optimum strategy in a far larger set of marketing contexts than what extant literature suggests.

Marketers put greater emphasis in pricing strategy during their marketing planning simply because pricing is one of the most important elements of marketing mix that can generate revenue. Formulating of product or service prices is a strategic activity because the price or prices assigned to a product or range of products will create an impact on consumer’s perception towards a company’s products and determine its subsequent purchase. Marketers need to exercise creativity in pricing strategy in order to attract consumer’s positive perceptions and purchase decisions. As a result, various pricing strategies have been introduced for products and services such as value-based pricing, bundle pricing, price skimming, penetration pricing, competitors oriented pricing, and discriminatory pricing to name a few. By applying all these creative pricing strategies, to great extent have enable marketers to compete effectively as well as to win over consumer’s perception in purchase decisions. On one hand, it is an effective strategy for the marketers to succeed in business. But on the other hand it may be unfavourable to the consumers especially when there are unfair trading practices occurred on the pricing strategies implemented. In this situation it is classified as anti-competition and abuse of dominant position. In order to protect both the business-to-business consumers and end consumers, the Malaysian government has implemented the Competition Act 2010 which came into force on 1 January 2012 with the aim to control anti-competition and abuse of dominant position. The Competition Act 2010 is changing the way marketers formulating and implementing their pricing strategies. This is because the Competition Act 2010 has specific clauses in prohibiting enterprises in setting prices by exploiting consumer’s position for their profiteering advantage. Hence, marketers are presently caught in a difficult position when formulating pricing strategy which at the same time has to comply with the Competition Act 2010. To date, limited review has been conducted on marketer’s pricing strategy vis-à -vis competition Act pricing policy. The purpose of this paper is to compare the marketer’s pricing strategy and competition Act pricing policy and to evaluate how the relevant sections of the competition Act impact marketer’s pricing decisions. In the conclusion, non-pricing strategies are recommended to counter the competition Act pricing policy prohibitions.

In this paper, we consider a duopoly market where two manufacturers separately produce and sell two complementary products through a common retailer as a leader–follower movement. The competition has been studied in two-echelon supply chain system and all produced products are sold by the retailer with individual product prices or with pure products’ bundling price in the non-cooperative market. The demand of each product linearly depends on prices of these two products as per their nature. Here, model for two different cases (without and with pure products’ bundling) are developed mathematically to maximize the profit of each participant of the supply chain and then corresponding optimal pricing strategies are worked out for the manufacturers and retailer. It is shown that supply chain profit for the pure bundling is better than the profit when products are sold at individual prices. Finally, the model is illustrated with numerical data to study the effects of models’ parameters in the pricing strategies and some marketing decisions are explored.

Component versus bundle pricing: The role of selling price deviations from price expectations

The aim of this Research Paper is to discuss both the old and new pricing strategies, methods and factors affecting the Indian Telecom Industry and various brands and consumers they entail. The case made here is to understand the Pricing strategies better and not prove or disprove any hypothesis or theory but to Pricing in an integral aspect for brands and consumers. Pricing strategy is what differentiates one brand from another and influences or tempts a consumer to purchase a product of that specific brand specifically in the Indian Telecom sector. Also, what implications does price of a product have on a consumer's behaviour. Pricing Methods essentially is derived from three main factors: Demand, Cost and Competitive Pricing. There are two basic factors that determine these pricing strategies: Invoice based and Subscription based. Where the Subscription based factor deals with either Pre-Paid or Post-Paid subscriptions and Invoice based factor with the incoming or outgoing based separately. Also, various pricing strategies are relevant in the Indian Telecom Industry which are Bundle Pricing, Skimming Pricing, Penetration Pricing, Value Based Pricing, Cost Plus Pricing and Discount Pricing. However, in recent past the pricing strategies have changed drastically and keep changing with newer technologies despite just three major players in the Indian Telecom Industry. Role spectrum auctioning, market saturation, competition and number of telecom providers in the market plays in shaping the Indian Telecom Industry ecosystem.

À la carte pricing and price elasticity of demand in air travel

We evaluate the theory of strategic decommoditization. The theory suggests that firms can strategically utilize Internet technologies to "decommoditize" the products that are being sold. This prompts the consumer to make a purchase decision that is less focused on price. This is an important new direction in the use of Internet technology to sell perishable products, which are subject to revenue yield management and for which numerous variations of a basic bundled offer are possible. We use data from a large international airline firm that offers tickets and tie-in services via its online portal. The latter includes frequent flyer mileage accrual, seat assignment, and itinerary change, among others. The airline offers a set of standard branded product bundles that can be modified by adding or removing services. This design is commonly referred to as an a la carte offering. We examine sales under this a la carte pricing mechanism and compare it to sales via channels that sell tickets in the more traditional manner, where bundled offers are less transparent and cannot be modified. We develop hypotheses about the value that consumers place on the a la carte channel and on the consequent differences in booking patterns across channels. We find that roughly one of six standard bundles is customized in the a la carte channel, and these customizations occur mainly for the low-feature standard bundles. We also find that the airline's frequent flyer members and business travelers purchase high-feature bundles more often in the a la carte channel than in the traditional channel. These findings support the theory of strategic decommoditization in the air travel context.