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Optimal Bundling and Pricing under a Monopoly: Contrasting Complements and Substitutes from Independently Valued Products

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  • R. Venkatesh

    (University of Pittsburgh)

  • Wagner Kamakura

    (Duke University)

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    Abstract

    We develop an analytical model of contingent valuations and address two questions of import to a monopolist: (i) should a given pair of complements or substitutes be sold separately (pure components), together (pure bundling), or both (mixed bundling), and at what prices? (ii) How do optimal bundling and pricing strategies for complements and substitutes differ from those for independently valued products? We find that the combination of marginal cost levels and the degree of complementarity or substitutability determines which of the three bundling strategies is optimal. Complements and substitutes should typically be priced higher than independently valued products.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 76 (2003)
    Issue (Month): 2 (April)
    Pages: 211-232

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    Handle: RePEc:ucp:jnlbus:v:76:y:2003:i:2:p:211-232

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Yue, Xiaohang & Mukhopadhyay, Samar K. & Zhu, Xiaowei, 2006. "A Bertrand model of pricing of complementary goods under information asymmetry," Journal of Business Research, Elsevier, Elsevier, vol. 59(10-11), pages 1182-1192, October.
    2. Alexei Alexandrov, 2006. "Fat Products," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1435, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Shelegia, Sandro, 2012. "Multiproduct pricing in oligopoly," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 30(2), pages 231-242.
    4. Akifumi Ishihara & Noriyuki Yanagawa, 2013. "Dark Sides of Patent Pools with Compulsory Independent Licensing," CARF F-Series, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo CARF-F-318, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    5. Armstrong, Mark, 2010. "Bundling revisited: substitute products and inter-firm discounts," MPRA Paper 26782, University Library of Munich, Germany.
    6. Timothy Gilbride & Joseph Guiltinan & Joel Urbany, 2008. "Framing effects in mixed price bundling," Marketing Letters, Springer, Springer, vol. 19(2), pages 125-139, June.
    7. Heiman, Amir & Ofir, Chezy, 2010. "The Effects of Imbalanced Competition on Demonstration Strategies," Discussion Papers, Hebrew University of Jerusalem, Department of Agricultural Economics and Management 93131, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.
    8. Gürlera, Ülkü & Öztop, Salih & Sen, Alper, 2009. "Optimal bundle formation and pricing of two products with limited stock," International Journal of Production Economics, Elsevier, Elsevier, vol. 118(2), pages 442-462, April.
    9. Mark Armstrong, 2012. "A More General Theory of Commodity Bundling," Economics Series Working Papers 624, University of Oxford, Department of Economics.
    10. Li, Minqiang & Feng, Haiyang & Chen, Fuzan & Kou, Jisong, 2013. "Numerical investigation on mixed bundling and pricing of information products," International Journal of Production Economics, Elsevier, Elsevier, vol. 144(2), pages 560-571.
    11. Sandro Shelegia, 2008. "Pricing Interrelated Goods in Oligopoly," Working Papers, International School of Economics at TSU, Tbilisi, Republic of Georgia 014-08, International School of Economics at TSU, Tbilisi, Republic of Georgia.
    12. Sheikhzadeh, Mehdi & Elahi, Ehsan, 2013. "Product bundling: Impacts of product heterogeneity and risk considerations," International Journal of Production Economics, Elsevier, Elsevier, vol. 144(1), pages 209-222.
    13. Hui-Ling Chung & Yan-Shu Lin & Jin-Li Hu, 2013. "Bundling strategy and product differentiation," Journal of Economics, Springer, Springer, vol. 108(3), pages 207-229, April.
    14. Mayer, Stefan & Klein, Robert & Seiermann, Stephanie, 2013. "A simulation-based approach to price optimisation of the mixed bundling problem with capacity constraints," International Journal of Production Economics, Elsevier, Elsevier, vol. 145(2), pages 584-598.
    15. 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.
    16. Cornwell, T. Bettina & McAlister, Anna R., 2012. "Promoting Healthful Foods: Could Water be the Answer?," 2012 AAEA/EAAE Food Environment Symposium, May 30-31, Boston, MA, Agricultural and Applied Economics Association 123533, Agricultural and Applied Economics Association.
    17. Jiang, Yuanchun & Shang, Jennifer & Liu, Yezheng, 2013. "Optimizing shipping-fee schedules to maximize e-tailer profits," International Journal of Production Economics, Elsevier, Elsevier, vol. 146(2), pages 634-645.
    18. Gupta, Abhay, 2007. "Measuring Quality Change due to Technological Externality in Multi-Feature Service Bundles," MPRA Paper 9284, University Library of Munich, Germany.
    19. Gila Fruchter & Eitan Gerstner & Paul Dobson, 2011. "Fee or free? How much to add on for an add-on," Marketing Letters, Springer, Springer, vol. 22(1), pages 65-78, March.

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