Price bundling: Difference between revisions
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The seller can even make this a mixed bundling strategy: offer both <math>X</math> and <math>Y</math> individually for <math>20</math> units, and offer the combination for slightly less than <math>35</math> units. | The seller can even make this a mixed bundling strategy: offer both <math>X</math> and <math>Y</math> individually for <math>20</math> units, and offer the combination for slightly less than <math>35</math> units. | ||
==External links== | |||
===Weblog entries/articles=== | |||
* [http://www.marginalrevolution.com/marginalrevolution/2004/04/why_cant_you_ch.html Why can't you choose your cable channels? -- Alex Tabarrok, Marginal Revolution, April 2004] | |||
Revision as of 10:04, 21 December 2009
This article describes a pricing strategy used by sellers, typically in markets that suffer from imperfect competition, significant transaction costs or imperfect information.
View other pricing strategies
Definition
Price bundling is a strategy whereby a seller bundles together many different goods/items being sold and offers the entire bundle at a single price.
There are two forms of price bundling -- pure bundling, where the seller does not offer buyers the option of buying the items separately, and mixed bundling, where the seller offers the items separately at higher individual prices. Mixed bundling is usually preferable to pure bundling, both because there are fewer legal regulations forbidding it, and because the reference price effect makes it appear even more attractive to buyers.
Motivation behind price bundling
Exploit different valuations by different buyers
Suppose there are two buyers, and , and two products, and . Suppose buyer values product at units above the cost of production, and values at units above the cost of production. Suppose buyer values at units above the cost of production, and at units above the cost of production.
The ideal thing for the seller would be to practice price discrimination: charge each buyer the maximum that buyer is willing to pay. However, this may be forbidden by law or otherwise difficult to implement.
Instead, the seller can pursue the following bundling strategy: charge slightly under units above production cost for the combination of and . Since both buyers value the combination at units, this deal appeals to both buyers. This allows to seller the obtain the entire social surplus as producer surplus.
The seller can even make this a mixed bundling strategy: offer both and individually for units, and offer the combination for slightly less than units.