Joint Pricing Strategies for Tobacco Manufacturing Equipment and Optional Value-added Service

Abstract

This paper constructs an analytic model for optimal pricing in which the interrelationship between thetobacco equipment and the optional value-added service supplied bytobacco equipment manufacturers are effectively depicted, and derives the closed-form solutions of the optimal prices, which has previously been considered analytically intractable in the bundling problem of pricing two goods. The research reveals that when the marginal cost of the optional value-added service is 0 and the valuation of the service for tobacco manufacturing enterprises is relatively low, it is advisable to adopt pure bundling pricing strategy; when the marginal cost of the service is 0 but the valuation of the service is relatively high, it is advisable to adopt separate pricing strategy; when the marginal cost of the service is greater than 0, separate pricing strategy is always optimal. And it is interesting that, under separate pricing strategy, the higher valuation of the tobacco equipment leads to lower price for the service; the higher marginal cost of the service leads to higher price for the service, but lower price for the tobacco equipment. This paper also proves that there are only two basic pricing strategies for tobacco equipment manufacturers: pure bundling pricing and separate pricing of the tobacco equipment and service.