Threshold-Based Mixed Bundling

33 Pages Posted: 22 Feb 2011 Last revised: 8 Jun 2011

Michael Bar

San Francisco State University

Kirill Chernomaz

San Francisco State University - Department of Economics

Diego Escobari

The University of Texas Rio Grande Valley; Texas A&M University - Department of Economics

Date Written: February 20, 2011

Abstract

This article explores the practice of bundling a free unit of good y (drink) with a threshold purchase of good x (food). Allowing for heterogeneity in consumer drink preferences we characterize the conditions under which the practice is strictly more profitable than linear pricing. An increase in food sales is the source of higher profits. Selection issues reduce profitable opportunities in heterogeneous populations of consumers relative to homogeneous populations. In some cases, an increase in profit from using the practice can be higher when consumers would not otherwise buy the drink. When heterogeneity is further extended to consumer food preferences similar results emerge from numerical calculations. The practice can be Pareto-improving if the seller has limited control over prices.

Keywords: Mixed bundling, Multi-product nonlinear pricing, Quantity discounts, Threshold

JEL Classification: D4, L1

Suggested Citation

Bar, Michael and Chernomaz, Kirill and Escobari, Diego, Threshold-Based Mixed Bundling (February 20, 2011). Available at SSRN: https://ssrn.com/abstract=1765997 or http://dx.doi.org/10.2139/ssrn.1765997

Michael Bar

San Francisco State University ( email )

1600 Holloway Avenue
San Francisco, CA 94132
United States

HOME PAGE: http://bss.sfsu.edu/mbar/index.htm

Kirill Chernomaz (Contact Author)

San Francisco State University - Department of Economics ( email )

1600 Holloway Avenue
San Francisco, CA 94132
United States
(415) 405-2699 (Phone)

HOME PAGE: http://online.sfsu.edu/~kirillch/

Diego Escobari

The University of Texas Rio Grande Valley ( email )

1201 W. University Drive
Edinburg, TX 78539-2999
United States

HOME PAGE: http://faculty.utrgv.edu/diego.escobari

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

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