Optimal Customized Bundle Pricing for Information Goods

Overview: This paper provides a model for choosing the optimal number of bundles and their prices in the context of designing markets for information goods. Selling bundled goods is a widespread phenomenon, and a recent paper showed that under conditions of zero marginal cost, and independent and identically distributed customer valuations, pure bundling is optimal for a multi-product monopolist. This paper aims at providing guidance to a monopolist selling a large number of information goods on how to optimally sell and price their goods by formulating the problem as a nonlinear mixed integer program based on a concept developed customized bundling strategy. Further this paper shows, using a nonlinear programming framework and numerical analyses, that in many cases, even with iid customers and zero marginal cost, offering multiple customized bundles may be better. In cases with non-iid customers, offering different customized bundles is clearly optimal; a pure bundling approach may lead to significant loss of profit. This research not only adds to the information goods pricing literature but also is of high practical use in guiding firms how to bundle and price information goods given their demand and cost structure.

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Format: PDF | Size: 399KB | Date: Aug 2002 | Pages: 23