Working Paper: NBER ID: w13916
Authors: 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).
Keywords: Pricing Strategies; Multiproduct Firms; Bundling; Consumer Behavior
JEL Codes: D4; L0; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bundlesize pricing (BSP) (L11) | profitability (L21) |
| bundlesize pricing (BSP) (L11) | profitability compared to component pricing (CP) (L11) |
| bundlesize pricing (BSP) (L11) | less heterogeneous demand than component pricing (CP) (L11) |
| bundlesize pricing (BSP) (L11) | surplus extraction from consumers with varying demand levels (D11) |
| bundlesize pricing (BSP) (L11) | profit maximization (L21) |