Bundling Information Goods: Pricing, Profits and Efficiency
We analyze pricing strategies for digital information goods, such as those increasingly available via the Internet. Because perfect copies of such goods can be created and distributed almost costlessly, any single positive price for copies is likely to be socially inefficient. However, we show that, under certain conditions, a monopolist selling information goods in large bundles instead of individually may nearly eliminate this inefficiency. In addition, the bundling strategy can extract as profits an arbitrarily large fraction of the area under the demand curve for the individual goods while commensurately reducing consumers' surplus. The bundling strategy is particularly attractive when the marginal costs of the goods are very low, when the correlation in the demand for different goods is low, and when consumer valuations for the individual goods are of comparable magnitude. We also describe the optimal pricing strategies when these conditions do not hold; show how private incentives for bundling can diverge from social incentives; and describe a mechanism to recover information about the underlying demand for each individual good. The predictions of our analysis appear to be consistent with empirical observations of the markets for Internet and on-line content, cable television programming, and copyrighted music.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- A. M. Spence, 1981. "The Learning Curve and Competition," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 49-70, Spring.
- Erik Brynjolfsson & Chris F. Kemerer, 1996.
"Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market,"
INFORMS, vol. 42(12), pages 1627-1647, December.
- Erik Brynjolfsson & Chris F. Kemerer, 1993. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Working Paper Series 158, MIT Center for Coordination Science.
- Roger B. Myerson & Mark A. Satterthwaite, 1981.
"Efficient Mechanisms for Bilateral Trading,"
469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Bakos, Yannis & Brynjolfsson, Erik & Lichtman, Douglas, 1999. "Shared Information Goods," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 117-55, April.
- William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 90(3), pages 475-498.
- Eric K. Clemons & Bruce W. Weber, 1997. "Information Technology and Screen-Based Securities Trading: Pricing the Stock and Pricing the Trade," Management Science, INFORMS, vol. 43(12), pages 1693-1708, December.
- R. Preston McAfee & John McMillan & Michael D. Whinston, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 371-383.
- Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," The Journal of Business, University of Chicago Press, vol. 57(1), pages S211-30, January.
- Salinger, Michael A, 1995. "A Graphical Analysis of Bundling," The Journal of Business, University of Chicago Press, vol. 68(1), pages 85-98, January.
- Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
When requesting a correction, please mention this item's handle: RePEc:wop:mitccs:199. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel)
If references are entirely missing, you can add them using this form.