From: Hugh Whalen <HWHA@UNB.CA>
Subject: Re: Bundling and the price of NT
Organization: The University of New Brunswick
Date: Thu, 15 Oct 1992 12:40:12 GMT

In article <1992Oct15.050157.29160@netcom.com> xtifr@netcom.com (Chris Waters) writes:
>In <14OCT92.20867480.0059@UNBVM1.CSD.UNB.CA> Hugh Whalen <HWHA@UNB.CA> writes:
>
>>I will repeat this one more time. THE PROPER STRATEGY IS TO MAXIMIZE
>>REVENUE MINUS THE VARIABLE COSTS SUCH AS PRODUCTION, MARKETING AND
>>SUPPORT. SINCE THE DEVELOPMENT COSTS ARE A CONSTANT THIS STRATEGY
>>WILL PRODUCE MAXIMUM PROFITS (OR MINIMUM LOSS). YOU ARE CONSIDERING
>>SOMETHING WHICH IS IRRELEVANT TO THE DECISION.
>
>Ok, accepting this for the moment, let's get back to specifics.
>Bundling the network software will increase the on-going variable costs
>of production, marketing, and, especially, support.  Thus the argument
>that the "sunk" costs can be ignored once the system has been developed
>is irrelevant to the question of whether bundling the network will
>affect the price of the OS.  Also, support and maintenance costs usually
>bear a linear relationship to the development costs.  This the
>development costs can be used to get a rough estimate of the ongoing
>costs.
>

OK Now we're getting somewhere here. We are considering the costs
that are relevant to the pricing decision.

>Now obviously, the final sale price of the product is going to be
>determined by the attempt to maximize profit, rather than an attempt to
>recoup even the ongoing costs.  However, the ongoing costs give us a
>bottom line--you cannot sell the product for less than it costs you to
>produce and support it.  (Loss leader and tax shelters will be ignored
>for the purposes of this discussion.)  :-)
>

Agreed, absolutely correct.

>So, now we get to Microsoft's motivation for bundling the network.  They
>obviously feel that they can maximize their profits by bundling--

Right again.

>probably because they feel that they can charge a slightly higher price,
>while still selling a lot of copies.  And, chances are good that the are

Not necessarily. This is where the arguement fails. They may think
that bundling will let them sell *more copies at the same price*.
This will also increase their profit.

This is one possible way of reasoning. Yours is another (legitimate)
way that they could look at this. I do not know the way they think.
You do not know the way they think. Bundling may or may not increase
the price. The point is that it may or may not increase the price.
We do not know. For you to say that it *will* is as baseless as it
would be for me to say it *will not*.


>right.  And the fact that this leaves a gap in the market, which is
>currently being filled by OS/2, is gravy to the OS/2 users.  :-)
>--
>.
If Microsoft prices the thing incorrectly, you may very well be right.


Hugh Whalen                |Questions are the important thing. Answers
Faculty of Administration  |are less important. Learning to ask good
University of New Brunswick|questions is the heart of intelligence.
                           |Learning the answer .... well answers are
                           |for students. Questions are for thinkers.
                           |               -- Roger C. Schank



DISCLAIMER: Neither UNB nor I care what the other thinks.

                       .