INFORMS Southeastern Michigan Chapter Distinguished Business Analytics Speaker Events
Add-on Pricing and Probabilistic Selling
Presenter: Chia-Wei Kuo, Ph.D. (National Taiwan University)
Abstract:
In the first part, I consider add-on pricing in a distribution channel where a retailer sells a base good and an add-on, supplied by two manufacturers, respectively, to consumers. The retailer decides whether to sell the two products through either bundling or add-on pricing and sets the corresponding retail prices. Under four channel structures differed by whether either manufacturer is independent of the retailer, I specify the scenario that is optimal for the retailer to adopt add-on pricing and show the contrasting impact from the two manufacturers. In addition to the demand smoothing effect of bundling, I identify two drivers from the supply side: the margin squeezing effect of bundling from the add-on manufacturer and the margin smoothing effect of bundling from the base manufacturer. The interplay of these drivers largely influences the retailer's add-on strategy and renders the preceding results.
In the second part, I investigate how the seller, upon selling multiple products, should adopt probabilistic or bundle selling, as opposed to traditional selling, to penetrate more market segments and price discriminate among consumers with different production costs, preferences for probabilistic products, and consumers' purchasing behaviors. The results show that when all customers are willing to purchase multiple products, bundle selling dominates in the case with low or moderate production costs. However, when all consumers prefer buying only one product, probabilistic selling becomes another strategy for the seller for market segmentation under which the seller even sacrifices the profit margin of the probabilistic product. Finally, the optimal selling strategy of the seller is highly related to the production costs, degree of horizontal differentiation, and whether consumers prefer buying one or multiple products.
Speaker Bio:
Chia-Wei Kuo is a Professor in the Department of Business Administration at National Taiwan University (NTU). He received his Ph.D. in Industrial and Operations Engineering from the University of Michigan. Chia-Wei's research interests are in the design and analysis of production and service systems, revenue management and supply chain management. His papers are published in Operations Research, Production and Operations Management, and European Journal of Operational Research. His research has been funded by multiple government and private agencies. At NTU, he is teaching BBA, MBA, Global MBA, and Executive MBA courses in Service and Operations Management, Business Decision Making, and Managerial Statistics. He has been awarded the outstanding mentor award, the Teaching Excellence Award of the University, and the Wu Da-Yao Research Award. He is currently on a research sabbatical at the Ross School of Business, University of Michigan.
Wednesday, November 9, 2022, Eastern Time 4:00 pm - 5:00 pm
Zoom Webinar
REGISTER NOW: https://umich.zoom.us/meeting/register/tJAtcOysrDgqGtQAv3dYinFPrzX_eQtNj3xW
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Zhixin Liu
Associate Professor
University of Michigan-Dearborn
Dearborn MI
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