bundling - combining 2 or more products in a sale to gain a pricing advantage
- sometimes customers want 1 product but not the other
- conditions for bundling:
- heterogeneous customers
- can't price discriminate (and profit at the same time)
- demands negatively correlated
- consumers will buy bundle if the cost of the entire bundle is less than the the sum of the amount they're willing to pay for both goods individually
- ie. if customer is willing to pay $4 for good A and $6 for good B, then as long as the bundle costs $10 or less, they'll purchase it
- also, this bundle would also appeal to customer willing to pay $1 for good A and $9 for good B
- best used when customers each really only want 1 of the goods in the package
- examples of bundling: features in cars (sunroof, anything non-standard), hotel w/ airfare, premium channels
advertising - only done by firms w/ market power
- no point for price takers to make advertisements
- new demand function Q(P,A)
- quantity demanded not a function of price (P) and amount spent on advertising (A)
- profit = PQ(P,A) - C[Q(P,A)] - A
- revenue = price x quantity demanded
- cost = calculated by quantity
- subtract A for amount spent on advertising (another fixed cost)
- if demand price inelastic and advertising effective >> advertise more
- ie. diamond (Kay's jewelers)
Subject:
Subject X2:
