Nearly Optimal Pricing for Multiproduct Firms

62 Pages Posted: 4 Apr 2008 Last revised: 12 Jul 2010

See all articles by Chenghuan Sean Chu

Chenghuan Sean Chu

Federal Reserve Board of Governors

Phillip Leslie

National Bureau of Economic Research (NBER)

Alan T. Sorensen

National Bureau of Economic Research (NBER)

Date Written: April 2008

Abstract

In principle, a multiproduct firm can set separate prices for all possible bundled combinations of its products (i.e., "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. In this study we show that simple pricing strategies are often nearly optimal -- i.e., with surprisingly few prices a firm can obtain 99% of the profit that would be earned by mixed bundling. 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. These findings are based on an array of numerical experiments covering a broad range of demand and cost scenarios, as well as an empirical analysis of the pricing problem for an 8-product firm (a theater company).

Suggested Citation

Chu, Chenghuan Sean and Leslie, Phillip and Sorensen, Alan T., Nearly Optimal Pricing for Multiproduct Firms (April 2008). NBER Working Paper No. w13916, Available at SSRN: https://ssrn.com/abstract=1116592

Chenghuan Sean Chu

Federal Reserve Board of Governors ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Phillip Leslie (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alan T. Sorensen

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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