ECON 325

In Class Exercise Seven – Price Structuring (Part One)

1.     What is price structuring – generally speaking?

2.     Match the following three pricing strategies with the situations:

Add-Ons

Versions

Bundles

a.     ___________________________Markets in which the heterogeneity in demand can be modeled along a single dimension.  A base product is increasingly enhanced so as to cater to customers who want higher-benefits and higher priced goods.

b.    ___________________________Markets with high heterogeneity in demand and multiple dimensions of demand heterogeneity.  Customers can select a base product and customize their product with various complementary products.

c.     ___________________________Markets in which the heterogeneity in demand can be modeled as contrasting, wherein some customers prefer the first set of products, other customers prefer the second set of products, and all product benefits are additive for all customers.

3.     Costco and Sam’s Club both offer annual memberships in exchange for discounted prices.  Customers tend to purchase items in bulk at Costco and Sam’s Club.  How are shopping clubs like Costco or Sam’s Club priced like a two-part tariff?  Do two-part tariffs simply offer “bulk discounts”?  What other sources of value might the annual membership confer to patrons of Costco or Sam’s Club?

4.     Both HP and Kodak offer printers and ink to the market.  HP tends to price their printers low and their ink high.  Kodak tends to price their printers high and their ink low.  What is the price structure used by HP?  By Kodak?  If customers are more sensitive to the upfront price of a printer, which price structure is likely to prove more profitable?  Explain.

5.     There have been antitrust suits against tying arrangements.  For example Xerox tied the sale of their paper and other supplies in their contracts when a customer bought their copier machines.  One of the defenses often used by the companies using these arrangements is that the strategy is a quality control strategy.  What do you think they mean by this?

6.  Do you have any other questions over this material?