Economic Price Theory on the Example of Time Warner Company

NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.

NB: All your data is kept safe from the public.

There is an important question of how much to charge for a product or a service. This is an important field for debates. But there is a more important one for the vendor to be concerned with. The question is: how much do customers value the products or services, and other intangibles that the company/vendor provides?

There pricing could be performed manually and could be automated. It’s a process of applying prices to purchase and sales orders. It depends on some factors: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, a combination of multiple orders or lines, and many others. Automated pricing is a more costly and difficult process but it practically eliminates pricing errors.

The competition also plays an important role in pricing: the higher the competition the lower the prices are. And bundling also plays a role in that aspect, because sometimes it makes the consumer think that he/she is paying less for something than it would be if he/she would pay for it separately. The difference in prices could be that low, that losses of the company on a large scale are minimal. Also, the fact that the product or service wouldn’t be bought, because of its separate price lowers losses practically to zero.

Some main goals should be reached when the price is set correctly. It should achieve the financial goals of the enterprise. It has to be realistic so that the customers would buy the product or service at that price, etc. The psychological aspect of bundling in that case is playing a huge role. Paying 100 dollars for a single item is less to be successful than paying 160 for 3 items. The basic human factor comes into play. People want more for less money. Some of the services or goods in the bundle may be useless and never used by the customers, but the knowledge that you bought something cheaper than it could be makes the deal more rational from your point of you.

Price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product. On the example of Time Warner company, we could see that the bundling systems that are promoted are actively distributed through the Internet, where the customers have a chance to compare it with other companies. That’s why it’s important to make visibility that Time Warner offers more than other companies.

Price will usually need to be relatively high if manufacturing is expensive, distribution is exclusive, and the product is supported by extensive advertising and promotional campaigns. In this case, the production is cheap, because of its nature and absence of aspects of exclusiveness in the distributional process.

An efficient price is a price that is very close to the maximum that customers are prepared to pay. Time Warner presents a bundle of services at a certain price; these services could be more expensive if sold separately, but at the same time they could be cheaper. But the customer sees that their couple of services together sold by one price and it makes them think that this is cheaper and the price is very good comparing to the competition. This is basic psychological pricing.

Bundling is a marketing strategy that is understood by the offering of several services or products as a single one. This strategy is very common in the software business (for example, bundle a database into a single office suite) and in the fast-food industry in which multiple items are combined into a complete meal.

There couple of cases, when this strategy is efficient: there are economies of scale in production, there are economies of scope in distribution, consumers appreciate the resulting simplification of the purchase decision and benefit from the joint performance of the combined product when the marginal costs of bundling are low when production set-up costs are high when customer acquisition costs are high.

Product bundling is most suitable for high volume and high margin products. Bundling is especially effective for digital “information goods” with close to zero marginal cost, and could enable a bundler with an inferior collection of products to drive even superior quality goods out of the marketplace. That’s why companies like Time Warner, NetZero, and some other companies competing in this area are exploiting bundling actively.

In oligopolistic and monopolistic industries, bundling is considered to be a negative phenomenon, because it limits the choices of the customers. In the modern economy monopolized markets are not so common. Concerning the Time Warner case, price bundling is another way of competing with dozens of competitors. The more customers are using a bundle of the company, the fewer chances that any of the services of other companies will be used if they are in the bundle. Core service is making the customer use the additional services or products because they are only compatible with the products or services from the bundle. Wouldn’t that lead eventually to monopolization? No, because specifically the market that is of Time Warner concern is classified with a high level of competition and if this company offers a bundle another one will offer a “better” one and there is no guaranty that the customer will be loyal.

It is also important to understand that local conditions may also affect the market strategy of the company. For example, a local Internet provider is offering a service that is cheaper than Time Warner’s, but other services are more expensive. At the same time, the other services in the bundle are cheaper. Using service bundling the company is eliminating the possibility that the consumer will use another company.

Bundling is a tool of economic development. Companies need capital for constant economic development. A bundle is a way of getting money. For example, a customer wouldn’t buy a 100 $ service, that way a company will lose money. But he/she would buy it in a bundle total cost of which is 160 dollars. It looks cheaper for the customer and at the same time, it maintains the vital flow of the capital, needed so much for the company. Because a lot of services provided by Time Warner are virtual it’s a perfect scenario for their economic prosperity.

Bundling also is a way of promoting products. For example, a client wants to use a couple of services from the bundle, but he/she doesn’t want to use the rest. After paying for the bundle the client sooner or later will use the services that he/she didn’t need, sometimes just because he/she paid for them or other circumstances.

Pure bundling occurs when a consumer can only purchase the entire bundle or nothing, mixed bundling occurs when consumers are offered a choice between purchasing the entire bundle or one of the separate parts of the bundle.

Another important aspect of pricing is price discrimination. Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. Price bundling is also a good example of price discrimination. A single service could be expensive, but when it is purchased in a bundle it is cheaper. A lot of companies intentionally make their single services more expensive, so that a bundle would be purchased. In a theoretical market with perfect information, no transaction costs, or a prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopoly markets. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. However, market frictions in oligopolies such as the airlines, and even in fully competitive retail or industrial markets allow for a limited degree of differential pricing to different consumers. Price discrimination also occurs when it costs more to supply one customer than it does another, and yet the supplier charges both the same price.

But price discrimination is not something to be afraid of. “Price discrimination” is a technical term meaning only differentiation in price by the customer, and is not intended as an accusation of criminal or unfairly biased behavior. The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very efficient, but the output can also decline when discrimination is more effective at extracting surplus from high-valued users than expanding sales to low-valued users.

After analyzing all of this information the strategy of Time Warner and other market giants can be easily understood and analyzed. The company is offering bundles, because it wants to obtain as many customers as possible, using mainly psychological and economic strings to affect the customer and his/her behavior. A 99$ bundle doesn’t have to be that good and doesn’t have to satisfy your real needs. It doesn’t mean that all of the bundles are completely useless and there is no need to buy them. Some of the products or services in the bundle you might have never used and haven’t had a chance to know how they can satisfy your consumer needs. By purchasing bundles, people are enlarging the circle of things that are helping in their life and making it easier.

Bibliography

Backman, Jules. Price Practices and Price Policies: Selected Writings. New York: Ronald Press, 1953.

McNamara, John R. “Pricing and Technological Change in Regional Telecommunications Companies.” Review of Business” 10.4 (1989).

Thin, Tun. Theory of Markets. Cambridge, MA: Harvard UP, 1960.

Smith, Stanley D., and Larry A. Frieder. “Product Pricing Risk.” ABA Banking Journal 90.4 (1998): 46

Click Here To Order Now!

Economic Price Theory on the Example of Time Warner Company

Do you need this or any other assignment done for you from scratch?

We have qualified writers to help you.

We assure you a quality paper that is 100% free from plagiarism and AI.

You can choose either format of your choice ( Apa, Mla, Havard, Chicago, or any other)