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Optimal Bundling Strategies Under Heavy-Tailed Valuations

  • Rustam Ibragimov


    (Department of Economics, Harvard University, Cambridge, Massachusetts 02138)

  • Johan Walden


    (Haas School of Business, University of California, Berkeley, Berkeley, California 94720)

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    We develop a framework for the optimal bundling problem of a multiproduct monopolist, who provides goods to consumers with private valuations that are random draws from a distribution with heavy tails. We show that in the Vickrey auction setting, the buyers prefer separate provision of the goods to any bundles. We also provide a complete characterization of the optimal bundling strategies for a monopolist producer, who provides goods for profit-maximizing prices. For products with low marginal costs, the seller's optimal strategy is to provide goods separately when consumers' valuations are heavy-tailed and in a single bundle when valuations are thin-tailed. These conclusions are reversed for goods with high marginal costs. For simplicity, we use a specific class of independent and identically distributed random variables, but our results can be generalized to include dependence, skewness, and the case of nonidentical one-dimensional distributions.

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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 56 (2010)
    Issue (Month): 11 (November)
    Pages: 1963-1976

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    Handle: RePEc:inm:ormnsc:v:56:y:2010:i:11:p:1963-1976
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