TAILIEUCHUNG - BUNDLING INFORMATION GOODS: PRICING, PROFITS AND EFFICIENCY

This report focuses on a set of tools to address youth exposure that has been largely ignored: State laws that restrict youth expo- sure to alcohol advertising in both measured and unmeasured media venues. States have systems already in place for administer- ing alcohol advertising regulations, usually (but not always) housed in an Alcoholic Beverage Control (ABC) state agency. Alcohol producers, distributors, and retailers must obtain state licenses to do business in a state. Although specific authority varies by state, in general the ABC agencies have broad authority to enact regulations (based on state statutes), investigate potential violations, and impose administrative sanctions. In control. | Bundling Information Goods Pricing Profits and Efficiency Yannis Bakos and Erik Brynjolfsson First Draft December 1996 Current Draft February 1999 Forthcoming in Management Science Copyright 1996 1997 1998 by Yannis Bakos and Erik Brynjolfsson Stern School of Business New York University email bakos@ Sloan School of Management Massachusetts Institute of Technology email erikb@ Bundling Information Goods Pricing Profits and Efficiency ABSTRACT We study the strategy of bundling a large number of information goods such as those increasingly available on the Internet and selling them for a fixed price. We analyze the optimal bundling strategies for a multiproduct monopolist and we find that bundling very large numbers of unrelated information goods can be surprisingly profitable. The reason is that the law of large numbers makes it much easier to predict consumers valuations for a bundle of goods than their valuations for the individual goods when sold separately. As a result this predictive value of bundling makes it possible to achieve greater sales greater economic efficiency and greater profits per good from a bundle of information goods than can be attained when the same goods are sold separately. Our main results do not extend to most physical goods as the marginal costs of production for goods not used by the buyer typically negate any benefits from the predictive value of large-scale bundling. While determining optimal bundling strategies for more than two goods is a notoriously difficult problem we use statistical techniques to provide strong asymptotic results and bounds on profits for bundles of any arbitrary size. We show how our model can be used to analyze the bundling of complements and substitutes bundling in the presence of budget constraints and bundling of goods with various types of correlations. We find that when different market segments of consumers differ systematically in their valuations for goods simple bundling will no .

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