Source:
Management Science, Volume 51, Issue 10, p.1481-1493 (2005)
Keywords:
information goods;
digital goods;
pricing;
bundling;
self-selection;
Internet
Abstract:
With declining costs of distributing digital products comes renewed interest in strategies for pricing goods
with low marginal costs. In this paper, we evaluate customized bundling, a pricing strategy that gives
consumers the right to choose up to a quantity M of goods drawn from a larger pool of N different goods
for a fixed price. We show that the complex mixed-bundle problem can be reduced to the customized-bundle
problem under some commonly used assumptions. We also show that, for a monopoly seller of low marginal
cost goods, this strategy outperforms individual selling (M = 1) and pure bundling (M = N) when goods
have a positive marginal cost or when customers have heterogeneous preferences over goods. Comparative
statics results also show that the optimal bundle size for customized bundling decreases in both heterogeneity
of consumer preferences over different goods and marginal costs of production. We further explore how the
customized-bundle solution is affected by factors such as the nature of distribution functions in which valuations
are drawn, the correlations of values across goods, and the complementarity or substitutability among products.
Altogether, our results suggest that customized bundling has a number of advantages—both in theory and
practice—over other bundling strategies in many relevant settings.
Notes:
Posted with permission of INFORMS