The Simple Economics Of Optimal Bundling

Download or read book The Simple Economics of Optimal Bundling written by Frank Yang and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 apply these insights to connect optimal bundling and quality design to price elasticities and cost structures: (i) when price elasticities are quasi-convex on the set of bundles, nested bundling is always optimal and the optimal mechanism simply creates nests in the order of price elasticities; (ii) when consumers' preferences are multiplicative, the optimal quality design can be characterized by the lower monotone envelope of the average cost curve.