Session 5

Question 1

Versioning

Answer 1

The provision of two different versions/quality levels of a product aimed at different consumer segments.

Question 2

Versioning is a variant of price discrimination also known as

Answer 2

quality discrimination

Question 3

Aim of versioning

Answer 3

Make consumers self-select to a product, depending on their willingness to pay (WTP)

Examples:
○ Business vs. Economy Flights
○ Cinema seats
○ Different versions of spotify accounts
○ Lite vs. pro versions

Question 4

How can firms actively segment their consumer base?

Answer 4

1. Different price sensitivity
2. Network effects
3. Sharing / Licensing

Question 5

Different price sensitivity

Answer 5

● When different consumers react differently to price changes, price changes for different groups can be beneficial (e.g., business users will be less price-sensitive compared to private users).
● Example: dropbox and referral marketing

Question 6

Network effects

Answer 6

● When the utility of a good/service depends on how many other people are using the good/service, then the price can vary on this basis (e.g., setting low introductory prices to attract consumers that benefit from each other).

Question 7

Sharing / Licensing

Answer 7

● E.g., access to research journals for university libraries and high pricing single article prices for industry readers.

Question 8

What you should do as a product developer? (versioning)

Answer 8

● Design your product in a way that it can be easily versioned (obvious).
● First, develop the highest possible quality, then take out features to create lower quality versions.
● Number of versions
○ Offer as many versions as there are differentiable consumer segments.
○ Offer at least three versions → “Extremeness aversion”

Question 9

Bundling

Answer 9

Bundling is coined as the joint offer of products that are related to each other to sell them as one unit.

Examples:
• Video game 
• Travels
• Telcom
• Insurance

Question 10

Bundling can … consumer heterogeneity

Answer 10

decrease

Question 11

Why Bundle?

Answer 11

1. Reduce dispersion
2. Skim off consumer rent
3. Products work together
4. Introduction new product
5. Zero incremental price
6. Increase switching cost

Question 12

Reduce dispersion?

Answer 12

● In a large bundle, high and low valuations for individual goods tend to average out so a bundle has more consumers with “moderate” valuations
● The seller can better predict consumer valuations for the bundle and then set a price that extracts more value

Question 13

Skim off consumer rent example

Answer 13

Offering word/excel/pp as a whole in ‘Office’

Question 14

Rule of thumb: bundling

Answer 14

Bundling in a two-product case is beneficial when a

consumer’s valuation for the two products is negatively correlated

Question 15

Difference between bundling and versioning:

Answer 15

○ Versioning: Try to find groups with different WTPs and set profit maximising version prices accordingly

○ Bundling: try to find a bundle for which the total consumer valuation by all consumers is as large as possible - despite drastic differences in the valuation of individual components

Question 16

Different types of bundling?

Answer 16

1. Pure
2. Mixed
3. Pure components
4. Mixed components

Question 17

Pure Bundling

Answer 17

Products are exclusively offered as a bundle

Question 18

Mixed Bundling

Answer 18

Consumers can choose between all single components or the bundle

Question 19

Mixed components

Answer 19

Consumers can choose between bundle and a limited number of single components

Not all components are offered alone!

Question 20

Pure components

Answer 20

No bundling

Question 21

How many versions should you make when versioning?

Answer 21

As many versions as there are differentiable consumer segments.

Offer at least three versions → “Extremeness aversion”