Mixed bundling with profit and sales objectives

Abstract

Suppose the marginal cost of a bundle is less than the sum of the marginal costs of the two products that make up the bundle. In this case, even when demands are completely uncorrelated, bundling is profitable but usually reduces total sales. The primary assumption of this paper is that firms are reluctant to bundle because they resist the loss in sales. Three optimization problems are analyzed: no bundling, mixed bundling, and bundling with profits and sales objectives, in which the firm has an objective function with a penalty for lost sales. This paper will show that firms benefit by bundling even if they modify their prices in such a way to reduce (or reverse) any loss in sales.