Bundling Information Goods: Pricing, Profits and Efficiency

38 Pages Posted: 21 Jul 1997  

Yannis Bakos

New York University (NYU) - Department of Information, Operations, and Management Sciences

Erik Brynjolfsson

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: April 1998

Abstract

We analyze pricing strategies for digital information goods, such as those increasingly available via the Internet. Because perfect copies of such goods can be created and distributed almost costlessly, any single positive price for copies is likely to be socially inefficient. However, we show that, under certain conditions, a monopolist selling information goods in large bundles instead of individually may nearly eliminate this inefficiency. In addition, the bundling strategy can extract as profits an arbitrarily large fraction of the area under the demand curve for the individual goods while commensurately reducing consumers' surplus. The bundling strategy is particularly attractive when the marginal costs of the goods are very low, when the correlation in the demand for different goods is low, and when consumer valuations for the individual goods are of comparable magnitude. We also describe the optimal pricing strategies when these conditions do not hold; show how private incentives for bundling can diverge from social incentives; and describe a mechanism to recover information about the underlying demand for each individual good. The predictions of our analysis appear to be consistent with empirical observations of the markets for Internet and on- line content, cable television programming, and copyrighted music.

Suggested Citation

Bakos, Yannis and Brynjolfsson, Erik, Bundling Information Goods: Pricing, Profits and Efficiency (April 1998). Available at SSRN: https://ssrn.com/abstract=11488 or http://dx.doi.org/10.2139/ssrn.11488

Yannis Bakos (Contact Author)

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States
212-998-0841 (Phone)

HOME PAGE: http://www.stern.nyu.edu/~bakos

Erik Brynjolfsson

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E53-313
Cambridge, MA 02142
United States
617-253-4319 (Phone)

HOME PAGE: http://digital.mit.edu/erik

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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