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American Economic Review: Vol. 101 No. 1 (February 2011)

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Bundle-Size Pricing as an Approximation to Mixed Bundling

Article Citation

Chu, Chenghuan Sean, Phillip Leslie, and Alan Sorensen. 2011. "Bundle-Size Pricing as an Approximation to Mixed Bundling." American Economic Review, 101(1): 263-303.

DOI: 10.1257/aer.101.1.263

Abstract

Multiproduct firms can set separate prices for all possible bundled combinations of its products "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. We find that simple pricing strategies are often nearly optimal. 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. (JEL D24, D42, L11, L13, L25)

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Authors

Chu, Chenghuan Sean (Federal Reserve Board)
Leslie, Phillip (Stanford U)
Sorensen, Alan (Stanford U)

JEL Classifications

D24: Production; Cost; Capital, Total Factor, and Multifactor Productivity; Capacity
D42: Market Structure and Pricing: Monopoly
L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L13: Oligopoly and Other Imperfect Markets
L25: Firm Performance: Size, Diversification, and Scope


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