The Simple Economics of Optimal Bundling

50 Pages Posted: 28 Dec 2022 Last revised: 8 Apr 2023

See all articles by Frank Yang

Frank Yang

Stanford Graduate School of Business

Date Written: April 7, 2023

Abstract

We study optimal bundling when consumers differ in one dimension. We introduce a partial order on the set of bundles defined by (i) set inclusion and (ii) sales volumes (if sold alone and priced optimally). We show that if the undominated bundles with respect to this partial order are nested, then nested bundling (tiered pricing) is optimal. We characterize which nested menu is optimal: Selling a given menu of nested bundles is optimal if a smaller bundle in (out of) the menu sells more (less) than a bigger bundle in the menu. We present three applications of these insights: the first two connect optimal bundling and quality design to price elasticities and cost structures; the last one establishes a necessary and sufficient condition for costly screening to be optimal when a principal can use both price and nonprice screening instruments.

Keywords: Bundling, tiered pricing, multidimensional screening, mechanism design

Suggested Citation

Yang, Frank, The Simple Economics of Optimal Bundling (April 7, 2023). Available at SSRN: https://ssrn.com/abstract=4311350 or http://dx.doi.org/10.2139/ssrn.4311350

Frank Yang (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, 94305
United States

HOME PAGE: http://web.stanford.edu/~shuny/

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