On the Benefit (Or Cost) of Large-Scale Bundling

Tarek Abdallah*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

Simple selling mechanisms are very appealing in practice, yet they may limit the firm’s ability to extract a large consumer surplus. In this paper, we study the efficiency of a simple pure bundling mechanism in extracting the consumer surplus in the presence of nonnegative marginal costs and correlated valuations. The main question we address is how to quantify the benefits of adopting a simple pure bundling mechanism relative to other more complicated mechanisms, such as mixed bundling. We develop simple robust analytics that identify the main drivers for the efficiency of the pure bundling mechanism and allow the sellers to easily quantify the potential profit of a large-scale bundling mechanism relative to more complicated selling mechanisms. Our numerical simulations show that these analytics provide high predictive power for the true performance of the bundling mechanism and are robust to different parametric assumptions even for relatively small bundles. For example, for a bundle of 1200 and 12,000 items, the medians of the prediction error of our tight bound are −0.021 and 0.041 while the interquartile ranges are 0.094 and 0.067, respectively.

Original languageEnglish (US)
Pages (from-to)955-969
Number of pages15
JournalProduction and Operations Management
Volume28
Issue number4
DOIs
StatePublished - Apr 2019

Keywords

  • asymptotics
  • bundling
  • law of large numbers
  • price discrimination
  • simple selling mechanisms

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

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