Optimal Bundling Strategies Under Heavy-Tailed Valuations

Rustam Ibragimov () and Johan Walden ()
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Rustam Ibragimov: Department of Economics, Harvard University, Cambridge, Massachusetts 02138
Johan Walden: Haas School of Business, University of California, Berkeley, Berkeley, California 94720

Management Science, 2010, vol. 56, issue 11, 1963-1976

Abstract: We develop a framework for the optimal bundling problem of a multiproduct monopolist, who provides goods to consumers with private valuations that are random draws from a distribution with heavy tails. We show that in the Vickrey auction setting, the buyers prefer separate provision of the goods to any bundles. We also provide a complete characterization of the optimal bundling strategies for a monopolist producer, who provides goods for profit-maximizing prices. For products with low marginal costs, the seller's optimal strategy is to provide goods separately when consumers' valuations are heavy-tailed and in a single bundle when valuations are thin-tailed. These conclusions are reversed for goods with high marginal costs. For simplicity, we use a specific class of independent and identically distributed random variables, but our results can be generalized to include dependence, skewness, and the case of nonidentical one-dimensional distributions.

Keywords: optimal bundling strategies; multiproduct monopolist; Vickrey auction; profit-maximizing prices; heavy-tailed valuations (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (15)

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