Sunday, June 19, 2011
Museum Bundling
Stockholm's Moderna Museet (modern art museum) and the Arkitekturmuseet (architecture museum) share a building and, therefore, share a pricing plan. The first cost 100 krona and the second cost 60 krona, but the combination cost 140 krona.
I suspect most modern art fans are less enthusiastic about architecture and most architecture aficionados are less interested in modern art. For both groups, the profit-maximizing price for their first choice is greater than the profit-maximizing price for their second choice (adjusting for the apparent preference for modern art). That is, you would like to price discriminate between consumers' first choices and their second choices. But people rarely tell you which one they came for. With bundle pricing, they don't have to. So long as you are willing to take the same discount for both (20 krona in this case), they will self-select into the appropriate ticket purchase.
Mathematically, the increased sales from reducing the price on the second ticket has to more than make up for the lower margin. But this would be true since demand is usually more elastic for the second choice.
I suspect most modern art fans are less enthusiastic about architecture and most architecture aficionados are less interested in modern art. For both groups, the profit-maximizing price for their first choice is greater than the profit-maximizing price for their second choice (adjusting for the apparent preference for modern art). That is, you would like to price discriminate between consumers' first choices and their second choices. But people rarely tell you which one they came for. With bundle pricing, they don't have to. So long as you are willing to take the same discount for both (20 krona in this case), they will self-select into the appropriate ticket purchase.
Mathematically, the increased sales from reducing the price on the second ticket has to more than make up for the lower margin. But this would be true since demand is usually more elastic for the second choice.
We can model pure bundling using a simple demand structure. Suppose your marketing director surveyed consumers and estimated the following demand structure (values):
Art Museum Architecture museum
Art afficionados 100 40
Architecture afficionados 40 100
If the cost of serving a customer is zero, the museums make more money by offering only a bundle (what price should they charge) than they do by pricing separately. Verify this for yourself.
The reason is that you make consumers more homogeneous by bundling so you can extract their consumers surplus with a single price.
The reason is that you make consumers more homogeneous by bundling so you can extract their consumers surplus with a single price.
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ReplyDeleteIn concur that there is significant benefit to business operators when they make consumers buying options more homogeneous by implementing the bundling technique. This provides an opportunity for business owners to extract their consumer’s surplus with a single price. The same holds true for mobile phone retailers who frequently bundle the prices of several products and services together for their new customers. They offer the phone itself with a package that also includes the 2-year phone plan, internet access, and phone charger. Although this bundling approach benefits the customer because it provides them with all the tools they need for their phone all at once and it benefits the mobile phone retailer because they are selling the customer supplementary products and services other than just a phone, Priceintel it also yields significant profit for the retailer. Likewise, if the cost of serving a customer for the Art Museum and Architectural Museum is zero, the museums should make more money by offering only a bundle.
ReplyDeleteThe trick here would be determining how elastic the demand is so to that they can set a pricing structure that yields maximum profit. Naturally, maximum profit is realized when the situation reaches market equilibrium. That is, the price at which the quantity supplied is equal to the quantity demand (Froeb. 2014). At the end of the day, offering Art Museum and Architectural Museum in bundles provides benefits beyond simply getting more revenue from each customer. Furthermore, the bundling pricing strategy focuses on specific group segments by exploiting the heterogeneity in consumers' conditional reservation prices thus mitigating the possibility of cannibalization.
Leo Palmer ESC Econ.
Reference
Froeb, MCcann, Ward, Shor. (2014) Managerial Economics. A problem Solving Approach.
Ohio:South-Western Cengage Learning.
Price Intel. Price Bundling. Retrieved 3/16/15 from
http://www.priceintelligently.com/price-bundling
There are generally two ways companies experience growth: vertical integration and horizontal integration. Vertical integration involves expanding operations along its supplier path while horizontal integration involves expanding products or services along the same value chain in similar or different industries. When companies engage in horizontal integration especially through merger or acquisition, it may find itself faced with taking sales away from other products or cannibalizing its products. When the products are similar, one way to avoid cannibalizing is to reposition one product. The firm may also reduce the price of both goods if the products are compliments or increase the price of both goods if they are substitutes. However, another method of dealing with cannibalization is to bundle products, which offers a way to extract more consumer surplus. Consumers seem more likely to give up surplus when they “feel” they are getting a deal. I’ve seen this take place on salvage hunting shows such as American Pickers. They call the negotiations “dickering”, which often involving negotiating the price of a used good downward by adding another item to the negotiations or bundling items. Generally, the buyer feels good because they feel they have driven the price downward (but often they have actually spent more money), the seller feels good because they have gained more surplus or profit.
ReplyDeleteFroeb, L. M., MCCann, B. T., Shor, M., & Ward, M. R. (2014). Managerial Economics. Mason: South-Western Cengage Learning.