Large-Scale Bundle-Size Pricing: A Theoretical Analysis

Abstract

Can you sell multiple items by providing only prices for different sizes of bundles rather than the different possible combinations of them? In this paper, we provide a framework for understanding “bundle-size pricing” (or simply, BSP) where only a menu of bundle sizes and their corresponding prices are offered. Although BSP is commonly used across several industries, little is known about the optimal BSP policy in terms of sizes and prices, along with the theoretical properties of its profit. In this paper, we provide a simple and tractable theoretical framework to analyze the large-scale BSP problem where a multiproduct firm is selling a large number of products. We characterize the circumstances under which such policies perform well by studying the effect of various factors such as marginal cost or customers’ budget on the performance of BSP and identify possible causes of its inefficiency.