IDEAS home Printed from https://ideas.repec.org/p/wop/mitccs/199.html
   My bibliography  Save this paper

Bundling Information Goods: Pricing, Profits and Efficiency

Author

Listed:
  • Yannis Bakos
  • Erik Brynjolfsson

Abstract

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.

Suggested Citation

  • Yannis Bakos & Erik Brynjolfsson, 1997. "Bundling Information Goods: Pricing, Profits and Efficiency," Working Paper Series 199, MIT Center for Coordination Science.
  • Handle: RePEc:wop:mitccs:199
    as

    Download full text from publisher

    File URL: http://ccs.mit.edu/papers/CCSWP199
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
    2. Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," The Journal of Business, University of Chicago Press, vol. 57(1), pages 211-230, January.
    3. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    4. 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.
    5. Bakos, Yannis & Brynjolfsson, Erik & Lichtman, Douglas, 1999. "Shared Information Goods," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 117-155, April.
    6. Salinger, Michael A, 1995. "A Graphical Analysis of Bundling," The Journal of Business, University of Chicago Press, vol. 68(1), pages 85-98, January.
    7. Erik Brynjolfsson & Chris F. Kemerer, 1996. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Management Science, INFORMS, vol. 42(12), pages 1627-1647, December.
    8. A. M. Spence, 1981. "The Learning Curve and Competition," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 49-70, Spring.
    9. 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.
    10. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: http://ccs.mit.edu/wpmenu.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.