Integration-segregation decisions under general value functions: "Create your own bundle — choose 1, 2, or all 3!"

Martín Egozcue (), Sébastien Massoni, Wing-Keung Wong and RiÄ ardass Zitikis ()
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Martín Egozcue: Universidad de la República
RiÄ ardass Zitikis: University of Western Ontario

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: Whether to keep products segregated (e.g., unbundled) or integrate some or all of them (e.g., bundle) has been a problem of profound interest in areas such as portfolio theory in finance, risk capital allocations in insurance, and marketing of consumer products. Such decisions are inherently complex and depend on factors such as the underlying product values and consumer preferences, the latter being frequently described using value functions, also known as utility functions in economics. In this paper, we develop decision rules for multiple products, which we generally call ‘exposure units’ to naturally cover manifold scenarios spanning well beyond ‘products’. Our findings show, for example, that the celebrated Thaler's principles of mental accounting hold as originally postulated when the values of all exposure units are positive (i.e., all are gains) or all negative (i.e., all are losses). In the case of exposure units mixed-sign values, decision rules are much more complex and rely on cataloging the Bell-number of cases that grow very fast depending on the number of exposure units. Consequently, in the present paper we provide detailed rules for the integration and segregation decisions in the case up to three exposure units, and partial rules for the arbitrary number of units

Keywords: Bundling; marketing; mental accounting; portfolio theory; value function; utility function; majorization; functional inequalities; Bell number (search for similar items in EconPapers)
JEL-codes: C61 D01 D81 G02 M31 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2012-09
New Economics Papers: this item is included in nep-mkt and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:12057

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