Operations, Information and Decisions Papers

Document Type

Journal Article

Date of this Version

10-2005

Publication Source

Management Science

Volume

51

Issue

10

Start Page

1481

Last Page

1493

DOI

10.1287/mnsc.1050.0403

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.

Keywords

nformation goods, digital goods, pricing, bundling, self-selection, internet

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Date Posted: 27 November 2017

This document has been peer reviewed.