Bundling Information Goods: Pricing, Profits, and Efficiency

Abstract

W e study the strategy of bundling a large number of information goods, such as those increasingly available on the Internet, and selling them for a fixed price. We analyze the optimal bundling strategies for a multiproduct monopolist, and we find that bundling very large numbers of unrelated information goods can be surprisingly profitable. The reason is that the law of large numbers makes it much easier to predict consumers' valuations for a bundle of goods than their valuations for the individual goods when sold separately. As a result, this "predictive value of bundling" makes it possible to achieve greater sales, greater economic efficiency, and greater profits per good from a bundle of information goods than can be attained when the same goods are sold separately. Our main results do not extend to most physical goods, as the marginal costs of production for goods not used by the buyer typically negate any benefits from the predictive value of large-scale bundling.While determining optimal bundling strategies for more than two goods is a notoriously difficult problem, we use statistical techniques to provide strong asymptotic results and bounds on profits for bundles of any arbitrary size. We show how our model can be used to analyze the bundling of complements and substitutes, bundling in the presence of budget constraints, and bundling of goods with various types of correlations and how each of these conditions can lead to limits on optimal bundle size. In particular we find that when different market segments of consumers differ systematically in their valuations for goods, simple bundling will no longer be optimal. However, by offering a menu of different bundles aimed at each market segment, bundling makes traditional price discrimination strategies more powerful by reducing the role of unpredictable idiosyncratic components of valuations. The predictions of our analysis appear to be consistent with empirical observations of the markets for Internet and online content, cable television programming, and copyrighted music.

Information intermediaries and optimal information distribution

“…The client has a more stable expectation of the value of a collection of information on a particular topic. Bakos and Brynjolfson (1999) demonstrate that bundling is profitable for publishers, but the same arguments apply to an information intermediary developing a menu of information offerings from a variety of information producers. It becomes easier to assess the average consumer's valuation and price services appropriately when there are a large number of goods.…”

Cheap talk comparisons in multi-issue bargaining

“…The latter question is of particular interest since the monopoly pricing literature has shown that the gains from bundling large numbers of products can be substantial (Armstrong, 1999;Bakos and Brynjolfsson, 1999). The rank order of issues becomes very informative as the number of issues increases so the communication gains from bundling are also likely to be significant.…”

“…The rank order of issues becomes very informative as the number of issues increases so the communication gains from bundling are also likely to be significant. 3 Bundling does not always increase payoffs. For large u it is rare that both issues are desired enough to make a bundle worthwhile so no bundling is preferred.…”

Delayed multiattribute product differentiation

“…2 An important distinction between the two groups of models is that in the latter group, each product is competing with all others, while in the former consumers are truly heterogeneous in their preferences, and some products may have no overlap, i.e., may never be in direct competition. 3 In this paper we adopt the locational approach, which in our view better captures consumer heterogeneity and allows the explicit consideration of participation constraints that inevitably arise when dealing with a spatial distribution of endowed unobservable consumer characteristics. Our model is inspired by Salop's "circular city" [30], which we extend to a "cylinder" by adding a vertical product characteristic.…”