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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. Gregory Crawford, 2008. "The discriminatory incentives to bundle in the cable television industry," Quantitative Marketing and Economics, Springer, vol. 6(1), pages 41-78, March.
  2. Yannis Bakos & Erik Brynjolfsson, 1997. "Bundling Information Goods: Pricing, Profits and Efficiency," Working Paper Series 199, MIT Center for Coordination Science.
  3. Crawford, Gregory & Cullen, Joseph, 2006. "Bundling, Product Choice, and Efficiency: Should Cable Television Networks be Offered A La Carte?," Working paper 126, Regulation2point0.
  4. Steven Berry & James Levinsohn & Ariel Pakes, 2001. "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market," Cowles Foundation Discussion Papers 1337, Cowles Foundation for Research in Economics, Yale University.
  5. Crawford, Gregory S & Yurukoglu, Ali, 2011. "The Welfare Effects of Bundling in Multichannel Television Markets," CEPR Discussion Papers 8370, C.E.P.R. Discussion Papers.
  6. 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.
  7. Fang,H. & Norman,P., 2003. "To bundle or not to bundle," Working papers 18, Wisconsin Madison - Social Systems.
  8. Hendel, Igal, 1999. "Estimating Multiple-Discrete Choice Models: An Application to Computerization Returns," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 423-46, April.
  9. Phillip Leslie & Alan Sorensen, 2009. "The Welfare Effects of Ticket Resale," NBER Working Papers 15476, National Bureau of Economic Research, Inc.
  10. 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.
  11. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 475-98, August.
  12. Spence, A Michael, 1980. "Multi-Product Quantity-Dependent Prices and Profitability Constraints," Review of Economic Studies, Wiley Blackwell, vol. 47(5), pages 821-41, October.
  13. Armstrong, M., 1996. "Price discrimination by a many-product firm," Discussion Paper Series In Economics And Econometrics 9628, Economics Division, School of Social Sciences, University of Southampton.
  14. Phillip Leslie, 2004. "Price Discrimination in Broadway Theater," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 520-541, Autumn.
  15. Vassilis A. Hajivassiliou & Daniel L. McFadden & Paul Ruud, 1993. "Simulation of Multivariate Normal Rectangle Probabilities and their Derivatives: Theoretical and Computational Results," Working Papers _024, Yale University.
  16. Kamel Jedidi & Sharan Jagpal & Puneet Manchanda, 2003. "Measuring Heterogeneous Reservation Prices for Product Bundles," Marketing Science, INFORMS, vol. 22(1), pages 107-130, July.
  17. repec:rje:randje:v:37:y:2006:i:4:p:946-963 is not listed on IDEAS
  18. Malueg, David A. & Snyder, Christopher M., 2006. "Bounding the relative profitability of price discrimination," International Journal of Industrial Organization, Elsevier, vol. 24(5), pages 995-1011, September.
  19. 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.
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Citations

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Cited by:
  1. Loertscher, Simon & Niedermayer, Andras, 2012. "Assessing the Performance of Simple Contracts Empirically: The Case of Percentage Fees," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 435, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Joao Macieira & Pedro Pereira & Joao Vareda, 2013. "Bundling Incentives in Markets with Product Complementarities: The Case of Triple-Play," Working Papers 13-15, NET Institute.
  3. Chen, Yongmin & Zhang, Tianle, 2014. "Interpersonal Bundling," MPRA Paper 56165, University Library of Munich, Germany.
  4. 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, vol. 23(2), pages 423-438, June.
  5. Katherine Ho & Justin Ho & Julie Holland Mortimer, 2012. "The Use of Full-Line Forcing Contracts in the Video Rental Industry," American Economic Review, American Economic Association, vol. 102(2), pages 686-719, April.
  6. Benjamin Reed Shiller, 2013. "First Degree Price Discrimination Using Big Data," Working Papers 58, Brandeis University, Department of Economics and International Businesss School, revised Sep 2013.
  7. Loertscher, Simon & Niedermayer, Andras, 2012. "Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 434, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  8. 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.
  9. Phillip Leslie & Alan Sorensen, 2009. "The Welfare Effects of Ticket Resale," NBER Working Papers 15476, National Bureau of Economic Research, Inc.
  10. Yongmin Chen & Tianle Zhang, 2012. "Group Coupons: Interpersonal Bundling on the Internet," Working Papers 12-09, NET Institute.
  11. Gregory S. Crawford & Ali Yurukoglu, 2012. "The Welfare Effects of Bundling in Multichannel Television Markets," American Economic Review, American Economic Association, vol. 102(2), pages 643-85, April.
  12. 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.
  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.

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