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Bundled features in cars.

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Bundled features in cars.

by coderversion1 » Fri Aug 05, 2011 3:04 pm
Many car companies currently force customers to purchase option packages that bundle together a number of features. Consumer advocates want the government to pass a law that allows customers to select individual features and only pay for the features they actually want. Meanwhile, car companies argue that bundled pricing creates demand for less popular features and thereby creates economies of scale while also spurring innovation. As a result, car companies claim, bundled pricing is cheaper for customers than the ability to purchase individual features would be.

Which of the following would be most important for the government to determine before deciding whether to require car companies to offer individual features in order to reduce consumer costs?

A. Whether the margins offered by car companies to dealers would decrease due to the offering of individual features
B. Whether the number of features purchased would decrease if consumers could purchase features individually
C. Whether the number of new cars sold has been decreasing due to the increased availability of high-quality used cars
D. Whether car companies would need to change their production processes to allow mass customization
E. Whether innovation and the number of available features would decrease as a result of car companies offering individual features of purchase.

D OR E? OR B? Good question.

IMO E
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by BlindVision » Fri Aug 05, 2011 3:48 pm
coderversion1 wrote:Many car companies currently force customers to purchase option packages that bundle together a number of features. Consumer advocates want the government to pass a law that allows customers to select individual features and only pay for the features they actually want. Meanwhile, car companies argue that bundled pricing creates demand for less popular features and thereby creates economies of scale while also spurring innovation. As a result, car companies claim, bundled pricing is cheaper for customers than the ability to purchase individual features would be.

Which of the following would be most important for the government to determine before deciding whether to require car companies to offer individual features in order to reduce consumer costs?

A. Whether the margins offered by car companies to dealers would decrease due to the offering of individual features
B. Whether the number of features purchased would decrease if consumers could purchase features individually
C. Whether the number of new cars sold has been decreasing due to the increased availability of high-quality used cars
D. Whether car companies would need to change their production processes to allow mass customization
E. Whether innovation and the number of available features would decrease as a result of car companies offering individual features of purchase.

D OR E? OR B? Good question.

IMO E
B
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by need720+ » Sat Aug 06, 2011 12:22 am
IMO D
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by HSPA » Sat Aug 06, 2011 12:34 am
Ignore b: Customer dependent .. Out of scope for govt
D: Not bad but I have not seen anywhere that high cost is due to customization...

IMO E
First take: 640 (50M, 27V) - RC needs 300% improvement
Second take: coming soon..
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by need720+ » Sat Aug 06, 2011 8:01 am
HSPA wrote:Ignore b: Customer dependent .. Out of scope for govt
D: Not bad but I have not seen anywhere that high cost is due to customization...

IMO E
Let me try to explain...
Suppose there are in all 10 features offered. Now, if there are N number of customers, each of the N customers can choose from any of the 10 features. Now, on part of manufacturer, price is bound to shoot up as manufacturer would have to customize each and every single car according to feature requested by the customer.

Now, to evaluate the argument,if i say that "production processes" would have to be changed, then we will strengthen the argument as price is bound to go up and bundled pricing is cheaper for customer. However, if I say that "production processes" would remain unchanged, so there would be no impact on the price and this would weaken argument's conclusion that bundled pricing would remains the same.

E is not attacking the main conclusion of the argument. The main conclusion is the last line of the argument.
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by champ0007 » Sat Aug 06, 2011 7:07 pm
Narrowed the question to D/E

I picked E.

@need720+ - Nice explanation for D... I think that convinced me :))

btw, whats the official Answer ?
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by Sartaj » Sat Aug 06, 2011 7:56 pm
Conclusion: bundled pricing is cheaper for customers than the ability to purchase individual features would be.

Why does bundled pricing is cheaper for customers than the ability to purchase individual features would be?

Answer: it will spur innovation, bring economies of scale, and create demand for more features.

B only mentions number of features. it is incorrect.
High quality cars are not discussed in the argument. Thus, C is incorrect.
D may be correct but the argument does not discuss production processes. It seems to be incorrect.
E mentions two of the three reasons as written above. It is correct response.
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by force5 » Sat Aug 06, 2011 11:58 pm
Hi coderversion1 may i ask you the source of this problem. I am somehow not convinced with the answer choices. The conclusion specifically talks about the pricing and that bundled pricing is cheaper. innovation and available features are already not important for customers who want only specific features. Even if the company is able to give consumers new innovations and same features but the pricing is increased.... it will defeat the entire purpose of customers asking for such a choice.
in choice D- we are really not interested in company's production process for mass customization. More over we are talking about individual customization and not mass customization of a specific feature.
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by need720+ » Sun Aug 07, 2011 1:45 am
HI Codeversion,
Can we have the OA and OE for this one please?
Thanks
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by coderversion1 » Sun Aug 07, 2011 8:38 am
HSPA wrote:Ignore b: Customer dependent .. Out of scope for govt
D: Not bad but I have not seen anywhere that high cost is due to customization...

IMO E
Not asserting that D is the right answer but as told in the premises 'individual specific customization' while i am referring to "allows customers to select individual features and only pay for the features they actually want." can lead to higher prices definitely. Each car would need a different type of features set and assembly line methods of mass production will be affected. Just a thought.

And regarding the OA, as this question is from Kaplan's new experimental test number 10. The OA is not known, it was not disclosed in review test after the test was over. Sorry guys. May be an expert reply will help.
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by ColumbiaVC » Sun Aug 07, 2011 11:16 am
A[/spoiler]
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by rkanthilal » Sun Aug 07, 2011 7:09 pm
This was a tricky one, but I'll go with B...

Fact 1: Consumer advocates want the government to pass a law that allows customers to select individual features and only pay for the features they actually want.

P1: Many car companies currently force customers to purchase option packages that bundle together a number of features.
P2: Bundled pricing creates demand for less popular features and thereby creates economies of scale while also spurring innovation.
C1: Bundled pricing is cheaper for customers than the ability to purchase individual features would be.

I see this passage as consisting of a Fact and an Argument. The stand-alone fact is that "consumer advocates want the government to pass a law that allows customers to select individual features and only pay for the features they actually want". Notice that the advocates are not making an argument here. They are not saying that this will necessarily lead to lower costs. All the advocates are saying is that customers should have the freedom to only pay for the features they actually want.

The argument is from the car companies. The car companies state in P2 that "bundled pricing creates demand for less popular features and thereby creates economies of scale while also spurring innovation". The car company claims that bundled pricing does two different things.
1) Bundled pricing creates demand for less popular features and thereby creates economies of scale
2) Bundled pricing spurs innovation.
The car companies use this premise as support for their conclusion that "bundled pricing is cheaper for customers than the ability to purchase individual features would be".

Notice that this conclusion is not well supported by the premise. The only support for the claim that "bundled pricing is cheaper" is that bundled pricing creates demand for less popular features and thereby creates economies of scale. "Spurring innovation" is in no way tied to lower costs for the consumer within this argument.

The car companies are essentially saying that the unpopular options would cost more without bundled pricing because only a few people would choose to purchase those options. Because bundled pricing forces consumers to buy the unpopular options the car companies obtain economies of scale on the unpopular options and can therefore deliver those unpopular options at a lower cost.

Based on the premise that "bundled pricing creates demand for less popular features and thereby creates economies of scale" we can infer that there would be no change in the price of the popular options under an individual pricing model. This is because many people will order the popular options thus ensuring economies of scale. Since "economies of scale" is the only factor affecting costs that is discussed in the argument, we can infer that the popular options will not increase in price under an individual pricing model.

Questions Stem: Which of the following would be most important for the government to determine before deciding whether to require car companies to offer individual features in order to reduce consumer costs?

The Question Stem asks us to select what would be the most important for the government to determine prior to making a decision whether to require car companies to offer individual features in order to reduce consumer costs. Notice that the question stem is about reducing consumer costs. It is not about manufacturing cost or efficiency. It is not even about the value delivered to the customer. We should only focus on determining whether the amount of money the customer spends will increase or decrease.

A. "Whether the margins offered by car companies to dealers would decrease due to the offering of individual features." INCORRECT. The question is about the effect of individual pricing of options on customer costs. Dealer margins are not discussed in this argument.

B. "Whether the number of features purchased would decrease if consumers could purchase features individually." CORRECT. Per the question stem, we are trying to determine what effect requiring car companies to offer individual features would have on "reducing consumer costs". We have already inferred that under an individual pricing model the price of the popular options would stay the same and the price of the unpopular options would increase (see above for an explanation of this).

If we know that the number of features purchased would decrease, then we would know that on average people are spending less. This is because on average people would buy the popular options and not the unpopular options. In other words, people would no longer be forced to buy the unpopular options. They would only pay for the popular options and they would pay the same amount for these options as they were under the bundled pricing. Essentially, this would result in people saving on average the price of the unpopular options under the bundled pricing model.

IMO this answer choice is correct because if we know this information we can infer that people will be spending less on average.

C. "Whether the number of new cars sold has been decreasing due to the increased availability of high-quality used cars." INCORRECT. This question is not about the number of new or used cars that are sold. It is about the effect of individual options on customer costs.

D. "Whether car companies would need to change their production processes to allow mass customization." INCORRECT. It is tempting to connect changes in production processes to increased costs. IMO we cannot do this. First, we have no reason to believe that a change in the production process would automatically result in higher costs. It seems like it would but we have no reason to believe so. Second, the car companies never mention production processes as contributing to lower costs with bundled pricing. Since the production process is not mentioned as a specific factor in the argument we have no reason to believe that a change in the production process will have any significant effect on the costs.

E. "Whether innovation and the number of available features would decrease as a result of car companies offering individual features for purchase." INCORRECT. We are interested in determining the effect of individual pricing of options on customer costs. Innovation is mentioned in the argument. The car companies mention that bundled pricing spurs innovation. However, the car companies never connect innovation with lower costs. The car companies' argument gives us no information on what effect more or less innovation will have on the cost of options.
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