Bundle-Size Pricing as an Approximation to Mixed Bundling

Abstract

Multiproduct firms can set separate prices for all possible bundled combinations of its products (“mixed bundling”). However, this is impractical for firms with more than a few products, because the number of prices increases exponentially with the number of products. We find that simple pricing strategies are often nearly optimal. Specifically, we show that bundle-size pricing—setting prices that depend only on the size of bundle purchased—tends to be more profitable than offering the individual products priced separately and tends to closely approximate the profits from mixed bundling. (JEL D24, D42, L11, L13, L25).