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Bundle-Size Pricing as an Approximation to Mixed Bundling

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  • Chenghuan Sean Chu
  • Phillip Leslie
  • Alan Sorensen

Abstract

Multiproduct firms can set separate prices for all possible bundled combinations of its products "mixed bundling"). However, this is impractical for firms with more than a few products, because the number of prices increases exponentially with the number of products. We find that simple pricing strategies are often nearly optimal. Specifically, we show that bundle-size pricing--setting prices that depend only on the size of bundle purchased--tends to be more profitable than offering the individual products priced separately and tends to closely approximate the profits from mixed bundling. (JEL D24, D42, L11, L13, L25)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 1 (February)
Pages: 263-303

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:1:p:263-303

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References

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  1. Armstrong, Mark, 1999. "Price Discrimination by a Many-Product Firm," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(1), pages 151-68, January.
  2. Gregory S. Crawford & Ali Yurukoglu, 2012. "The Welfare Effects of Bundling in Multichannel Television Markets," American Economic Review, American Economic Association, American Economic Association, vol. 102(2), pages 643-85, April.
  3. Hajivassiliou, Vassilis & McFadden, Daniel & Ruud, Paul, 1996. "Simulation of multivariate normal rectangle probabilities and their derivatives theoretical and computational results," Journal of Econometrics, Elsevier, Elsevier, vol. 72(1-2), pages 85-134.
  4. Daniel McFadden, 1987. "A Method of Simulated Moments for Estimation of Discrete Response Models Without Numerical Integration," Working papers 464, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Ben Shiller & Joel Waldfogel, 2009. "Music for a Song: An Empirical Look at Uniform Song Pricing and its Alternatives," NBER Working Papers 15390, National Bureau of Economic Research, Inc.
  6. Levinsohn, James & Berry, Steven & Pakes, Ariel, 2004. "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market," Scholarly Articles 3436404, Harvard University Department of Economics.
  7. Phillip Leslie & Alan Sorensen, 2009. "The Welfare Effects of Ticket Resale," NBER Working Papers 15476, National Bureau of Economic Research, Inc.
  8. Fang,H. & Norman,P., 2003. "To bundle or not to bundle," Working papers, Wisconsin Madison - Social Systems 18, Wisconsin Madison - Social Systems.
  9. Gregory Crawford, 2008. "The discriminatory incentives to bundle in the cable television industry," Quantitative Marketing and Economics, Springer, Springer, vol. 6(1), pages 41-78, March.
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  11. Phillip Leslie, 2004. "Price Discrimination in Broadway Theater," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 520-541, Autumn.
  12. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(3), pages 475-98, August.
  13. Yannis Bakos & Erik Brynjolfsson, 1999. "Bundling Information Goods: Pricing, Profits, and Efficiency," Management Science, INFORMS, INFORMS, vol. 45(12), pages 1613-1630, December.
  14. repec:rje:randje:v:37:y:2006:i:4:p:946-963 is not listed on IDEAS
  15. Spence, A Michael, 1980. "Multi-Product Quantity-Dependent Prices and Profitability Constraints," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(5), pages 821-41, October.
  16. Hendel, Igal, 1999. "Estimating Multiple-Discrete Choice Models: An Application to Computerization Returns," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(2), pages 423-46, April.
  17. Kamel Jedidi & Sharan Jagpal & Puneet Manchanda, 2003. "Measuring Heterogeneous Reservation Prices for Product Bundles," Marketing Science, INFORMS, INFORMS, vol. 22(1), pages 107-130, July.
  18. Manelli, Alejandro M. & Vincent, Daniel R., 2006. "Bundling as an optimal selling mechanism for a multiple-good monopolist," Journal of Economic Theory, Elsevier, vol. 127(1), pages 1-35, March.
  19. Malueg, David A. & Snyder, Christopher M., 2006. "Bounding the relative profitability of price discrimination," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 24(5), pages 995-1011, September.
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Citations

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Cited by:
  1. Yongmin Chen & Tianle Zhang, 2012. "Group Coupons: Interpersonal Bundling on the Internet," Working Papers, NET Institute 12-09, NET Institute.
  2. Justin Ho & Katherine Ho & Julie Holland Mortimer, 2008. "The Use of Full-line Forcing Contracts in the Video Rental Industry," NBER Working Papers 14588, National Bureau of Economic Research, Inc.
  3. Anja Lambrecht & Katja Seim & Naufel Vilcassim & Amar Cheema & Yuxin Chen & Gregory Crawford & Kartik Hosanagar & Raghuram Iyengar & Oded Koenigsberg & Robin Lee & Eugenio Miravete & Ozge Sahin, 2012. "Price discrimination in service industries," Marketing Letters, Springer, Springer, vol. 23(2), pages 423-438, June.
  4. Loertscher, Simon & Niedermayer, Andras, 2014. "Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation," Working Papers 14-03, University of Mannheim, Department of Economics.
  5. Simon Loertscher & Andras Niedermayer, 2012. "Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation," Department of Economics - Working Papers Series, The University of Melbourne 1162, The University of Melbourne.
  6. Simon Loertscher & Andras Niedermayer, 2012. "Assessing the Performance of Simple Contracts Empirically:The Case of Percentage Fees," Department of Economics - Working Papers Series, The University of Melbourne 1163, The University of Melbourne.
  7. Joao Macieira & Pedro Pereira & Joao Vareda, 2013. "Bundling Incentives in Markets with Product Complementarities: The Case of Triple-Play," Working Papers, NET Institute 13-15, NET Institute.
  8. Benjamin Reed Shiller, 2013. "First Degree Price Discrimination Using Big Data," Working Papers, Brandeis University, Department of Economics and International Businesss School 58, Brandeis University, Department of Economics and International Businesss School, revised Sep 2013.
  9. Keith M. Marzilli Ericson & Amanda Starc, 2012. "Pricing Regulation and Imperfect Competition on the Massachusetts Health Insurance Exchange," NBER Working Papers 18089, National Bureau of Economic Research, Inc.
  10. Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2014. "Complexity, Efficiency, and Fairness of Multi-Product Monopoly Pricing," CESifo Working Paper Series 4692, CESifo Group Munich.
  11. Phillip Leslie & Alan Sorensen, 2009. "The Welfare Effects of Ticket Resale," NBER Working Papers 15476, National Bureau of Economic Research, Inc.
  12. Gregory S. Crawford & Ali Yurukoglu, 2012. "The Welfare Effects of Bundling in Multichannel Television Markets," American Economic Review, American Economic Association, American Economic Association, vol. 102(2), pages 643-85, April.
  13. Alexei Alexandrov & Özlem Bedre-Defolie, 2013. "The equivalence of bundling and advance sales," ESMT Research Working Papers ESMT-13-11, ESMT European School of Management and Technology.
  14. Chen, Yongmin & Zhang, Tianle, 2014. "Interpersonal Bundling," MPRA Paper 56165, University Library of Munich, Germany.

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