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Nearly Optimal Pricing for Multiproduct Firms

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  • Chenghuan Sean Chu
  • Phillip Leslie
  • Alan Sorensen

Abstract

In principle, a multiproduct firm can set separate prices for all possible bundled combinations of its products (i.e., "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. In this study we show that simple pricing strategies are often nearly optimal -- i.e., with surprisingly few prices a firm can obtain 99% of the profit that would be earned by mixed bundling. 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. These findings are based on an array of numerical experiments covering a broad range of demand and cost scenarios, as well as an empirical analysis of the pricing problem for an 8-product firm (a theater company).

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13916.

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Date of creation: Apr 2008
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Handle: RePEc:nbr:nberwo:13916

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Cited by:
  1. 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.
  2. Richard M. H. Suen, 2013. "Research Policy and U.S. Economic Growth," Working papers, University of Connecticut, Department of Economics 2013-18, University of Connecticut, Department of Economics.

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