Model and Optimal Solution of Bundle-Pricing Scheme Using Various Utility Functions

Fitri Maya Puspitaa*, Muthia Ulfaa

a
Mathematics Department, Faculty of Mathematics and Natural Sciences, Sriwijaya

University, Jln. Raya Palembang-Prabumulih KM 32 Inderalaya Ogan Ilir, South Sumatera

30662 Indonesia

* Corresponding author, e-mail: fitrimayapuspita@unsri.ac.id

ABSTRACT: In this modern era, internet is one of the basic needs for human kind. It is the

duty of the ISP to provide the best service to the user and also it is be beneficial for the Internet

Service Provider (ISP). Bundle is a pricing strategies that ISP can package various goods and

sell in single price. To fit any consumer preferences we may use utility function to combine

the objective function. Previosly research we discuss each utility function which is Quasi-

Linear and Bandwidth Function Diminished with Increasing Bandwidth then combine with

Bundle-Pricing theory. In this paper Cobb-Douglas, Quasi-Linear, and Bandwidth Function

Diminished with Increasing Bandwidth utility function is used to see which function gain

higher profit for ISP and also by considering user preferences. The model is separeted into

three main case for each utility function, in this paper the operation is only for Cobb-Douglas

the rest utility function result combine from the previos paper. The model formed by setting

variable and parameter into 3 sub case which is flat fee, usage based and two-part tariff pricing

scheme. LINGO 11.0 is used to solver each case and get the optimal solution, the model are

applied to the data traffic in Palembang local server. The result show for each cases bundle-

pricing get the optimal solution when using Bandwidth utility function.

KEYWORDS: bundle pricing, utility function, pricing strategies, optimal solution.

INTRODUCTION

There are several ways that can be done in determining the appropriate model pricing based on

each necessary requirement of consumers. Internet Service Provider (ISP) as a company that

provides internet service trying to maximize their profit by adjusting the model to each

customer. Information service requires utility function and determining the based price to gain

huge profits by adopting pricing scheme such as pricing scheme involving multi-classes QoS

(Quality of Service) network 1-2. Past research has discussed the use of bundle –pricing 3-4 in

the establishment of financing strategies. Bundle is a financing strategy in which some products
3,5-6
services combined in one package and are offered at one price . That research conducted

nonlinear mixed- integer programming approach that produced important factors in

determining the financing scheme of internet. The use of the utility function in the bundle

pricing model recently has been discussing in applying quasi-linear utility function and

bandwidth function diminished with increasing bandwidth 7-10.

So, in this study, a comparison for each case on any type of utility functions that the Cobb-

Douglas, quasi-linear, and bandwidth function diminished with increasing bandwidth will be

discussed for each case on the type of consumers and consumption levels that are equally good

at peak hours and non-peak hours. The determination of peak hours and off-peak hours

previously discussed 11 in the case of a study regarding the appropriate financing strategies for

information services. The model is solved using LINGO 11.012 in the determination of

appropriate financing schemes to solve the problems of both linear and nonlinear optimization.

Utility function is used to calculate the level of customer satisfaction in using a product service.

Use of utility function is excellent not only in maximizing revenues ISPs also consider the level

of customer satisfaction. Therefore, this study will be seen in which of the three utility functions
will get the highest profit in the bundle- pricing model which can be taken into consideration

for the ISP to offer a service product to sell bundle and involve utility function in pricing

scheme.

MATERIALS AND METHODS

In this research, first we discuss Cobb-Douglas utility function by determining the price of each

bundle, marginal cost that is the cost if we added more than one bundle in the main menu as

well as the determination of the level of consumption of each consumer. In this study we

assumed homogeneous consumers with the same level of consumption. LINGO program 11.0

is used in each model. The model is formed from the result of modifying the original model by

bundling5 and using Cobb-Douglas utility function13.

RESULTS and DISCUSSION

This section will discuss the process of model building with the use bundle modification5,14.

The best solution of the model is formed and compared with a solution in an earlier study using

a quasi-linear utility function7 and bandwidth utility function8.

Modified Bundle-Pricing Using Cobb-Douglas Utility Function

This model was adopted from a model -pricing bundle in5 and the utility function in13 as

follows :

Max 𝑅 = ∑ ∑ (𝑃𝑗 − 𝐵𝑗 )𝑋𝑖𝑗 − ∑ 𝑀𝑌𝑗

𝑖=1,2 𝑗=1,2 𝑗=1,2

−(𝑋 𝑎 + 𝑌 𝑏 ) + (𝑃𝑥 𝑋𝑖 ) + (𝑃𝑦 𝑌𝑖 ) + (𝑃𝑍𝑖 ) (1)

subject to :

𝑆𝑖 ≥ (𝑅𝑖𝑗 − 𝑃𝑗 )𝑌𝑗 , 𝑖 = 1, … 𝐼; 𝑗 = 1, … 𝐽 (2)

𝑆𝑖 = ∑𝑗=1,…,𝐽(𝑅𝑖𝑗 − 𝑃𝑗 ) 𝑋𝑖𝑗 , 𝑖 = 1, … 𝐼 (3)

(𝑅𝑖𝑗 − 𝑃𝑗 )𝑋𝑖𝑗 ≥ 0, 𝑖 = 1, … 𝐼; 𝑗 = 1, … , 𝐽 (4)

𝑋𝑖𝑗 ≤ 𝑌𝑗 , 𝑖 = 1, … 𝐼; 𝑗 = 1, … , 𝐽 (5)

∑𝑗=1,…,𝐽 𝑋𝑖𝑗 ≤ 1, 𝑖 = 1, … 𝐼 (6)

𝑆𝑖 ≥ 0, 𝑖 = 1, … 𝐼 (7)

𝑃𝑗 ≥ 0, 𝑗 = 1, … , 𝐽 (8)

𝑋𝑖𝑗 = 0 𝑜𝑟 1 , 𝑖 = 1, … 𝐼; 𝑗 = 1, … , 𝐽 (9)

Yj = 0 or 1, j = 1, … , J (10)

Description of the parameters used in the model above is already described in previous

research5.

Then the model is divided into three cases based on the type of pricing scheme. There are 3

types of financing used in this study is a flat fee , usage - based, and the two- part tariff each

case have different constraints as shown in the description below.

Model Bundle-Pricing Using Cobb-Douglas Utility Function in Case Flat Fee Pricing

Scheme

The model in this case using the same objective function as in Eq (1) which is then followed

by the constraints (2)-(10) was then added to the barriers to flat fee case as follows

𝑋𝑖 ≤ 𝑋̅𝑖 𝑍𝑖 (11)

̅𝑖 𝑍𝑖
𝑌𝑖 ≤ 𝑌 (12)
 −𝑈𝑖 (𝑋 ,𝑌 ) + 𝑃𝑋 𝑋𝑖 + 𝑃𝑌 𝑌𝑖 + 𝑃𝑍𝑖 ≥ 0 (13)
𝑖 𝑖

𝑍𝑖 = 0 or 1, 𝑖 = 1, … , 𝐼 (14)

𝑃𝑥 = 0 (15)

𝑃𝑦 = 0 (16)

𝑃>0 (17)

Model Bundle-Pricing Using Cobb-Douglas Utility Function Case for Usage Based

Pricing Scheme

The model in this case using the same objective function as in Eq. (1) which is then

followed by the constraints (2)-(14) was then added to the barriers to usage based case as

follows

𝑃𝑥 > 0 (18)

𝑃𝑦 > 0 (19)

𝑃=

0 (20

Model Bundle-Pricing Using Cobb-Douglas Utility Function Case for Two-Part Tariff

Pricing Scheme

The model in this case using the same objective function as in Eq. (1) which is then

followed by the constraints (2)-(14) was then added to the barriers to case two-part tariff as

follows

𝑃𝑥 > 0 (21)
 𝑃𝑦 > 0 (22)

𝑃>0 (23)

The model for each case based on the type of consumers solved using LINGO program 11.0.

The optimal solution in each case grouped in Table 1 and the value of the variable in this case

is shown in Table 2. The next best solution in bundle-pricing models with utility functions

Cobb-Douglas compared with the best solution bundle-pricing models both use a quasi-linear

utility function and bandwidth is shown as follows.

Table 1 Optimal Solution For Modified Model

Modified Models Using Cobb-Douglas Utility

Variables Function

Flat Fee Usage Based Two-Part Tariff

Model Class INLP INLP INLP

Local
State Local Optimal Local Optimal
Optimal

Objective 57001.2 56999.8 56999.8

Infeasibility 1,.6322 1.81899 10-12 1.94996 10-8

Iterations 1633 142 64

GMU 29K 27K 27K

ER 2s 0s 0s

Based on Table 1 it can be seen from each of the three cases based on the type of financing

that tends to produce the same objective value which amounted to IDR 57001.2, 56999.8 and

56999.8. Value of infeasibility declares conformity or suitability of those models for each case
in a row is worth 1.36322, 1.81899x10-12 and 1.94996x10-8. Furthermore, the values of the

variables of the three cases are shown in Table 2 as below.

Table 2 Variable Values for Modified Model

Modified Models Using Cobb-Douglas Utility

Function
Variables
Two-Part
Flat Fee Usage Based
Tariff

𝑃1 99999.88 31491.43 31499.9

𝑃2 31499.9 31499.9 30759.44

𝐵1 2000 2000 2000

𝐵2 2000 2000 2000

𝑋11 0 0 1

𝑋21 0 0 1

𝑋12 1 1 0

𝑋22 1 1 0

𝑌1 0 0 1

𝑌2 1 1 0

𝑆1 0.1 0.1 0.1

S2 9800.1 9800.1 9800.1

Based on Table 2 it can be seen that in three cases, it is showed a different value for each value

of the variable in which the value of S1 and S2 are a surplus or profit earned in the consumer

bundle menu. After obtaining a comparison the best solutions on the model bundle-pricing with

a Cobb-Douglas utility function, next step is to compare the best solutions from7 in which of
the three utility functions when combined with a model of the bundle which generate the largest

revenue value. Comparison of the three cases the optimal solution of the model is bundled with

a Cobb-Douglas, quasi-linear15 , and bandwidth utility functions8 are shown in Table 3.

Table 3 Comparison Solution of Bundle-Pricing Model Using Various Utility Functions

Modified Models

Cobb-Douglas
Quasi-Linear Using
Variables Using Flat Fee Bandwidth Using Flat Fee
Flat Fee Pricing
Pricing Pricing Scheme
Scheme
Scheme

Model
INLP INLP ILP
Class

State Local Optimal Local Optimal Local Optimal

Objective 57001.2 56999.8 62999.8

Infeasibility 1.36322 1.81899.10-12 1.81899 x 10-12

Iterations 1633 130 209

GMU 29K 27K 27K

ER 2s 0s 0s

Based on the table, we can see in Table 3 the bundle- pricing models achieve the highest value

so far this objective when paired in bandwidth utility function with a value of IDR 62999.8

with a flat fee type of financing therein. Models with the case settled through 209 iterations

and within 27 seconds using LINGO 11.0. So ISPs can pursue the customers to apply bundle

pricing for flat fee pricing scheme with the bandwidth utility function. The flat fee pricing
scheme can be promoted by ISP if they intend to increase the revenue with the bandwidth

attribute chosen.

CONCLUSION

Based on the results and discussion through several stages in completing and comparing

the best solution for ISPs in determining the appropriate utility function in the bundle- pricing

model we can be concluded that ISP scored largest revenue by using bandwidth decreases with

the increasing bandwidth on the type of financing flat fee utility functions with a value revenues

amounted to IDR 62999.8.

Acknowledgements:

The research leading to this study was financially supported by Directorate of Higher

Education Indonesia (DIKTI) for support through “Hibah Produk Terapan Tahun I”, 2016.

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