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Bundling Incentives

In: Industrial Organization

Author

Listed:
  • Pak-Sing Choi

    (National Central University)

  • Eric Dunaway

    (Wabash College)

  • Felix Muñoz-Garcia

    (Washington State University)

Abstract

This chapter explores settings where a monopolist offers two goods to customers who exhibit correlated valuations for each good. For instance, in a market with two consumers, i and j, and two goods, A and B, customer i is the individual with the highest valuation for good A but he is the one with the lowest value for good B. In this context, the monopolist can offer to sell each good, A and B, at a different price or, alternatively, sell the bundle of both goods at a single price. This is the setting that we consider in Exercise 9.1, showing that, when consumer valuations are negatively correlated, a firm has incentives to only offer the bundle and make a higher profit than selling each good separately. Exercise 9.2 considers bundling decisions when the valuations for the two products, A and B, are positively correlated, Exercise 9.3 provides a numerical example, and Exercise 9.4 extends our analysis to a setting where valuations can be negatively or positively correlated. Interestingly, we show that bundling is only profitable when valuations are negatively correlated.

Suggested Citation

  • Pak-Sing Choi & Eric Dunaway & Felix Muñoz-Garcia, 2023. "Bundling Incentives," Springer Texts in Business and Economics, in: Industrial Organization, edition 2, chapter 0, pages 537-564, Springer.
    • Handle: RePEc:spr:sptchp:978-3-031-38635-0_9
    DOI: 10.1007/978-3-031-38635-0_9
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