Bundling Information Goods: Pricing, Profits and Efficiency

By Yannis BakosErik Brynjolfsson
1996| Working Paper No. 1427

We analyze pricing strategies for digital information goods, such as those increasingly available via the Internet. Because perfect copies 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 substantially reduce 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._x000B__x000B_The bundling strategy is particularly attractive when the marginal costs of the goods are very low and when the correlation in the demand for different goods is low. We also describe the optimal pricing strategies when these conditions do not hold and show how private incentives for bundling can diverge significantly from social incentives. 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.