ABSTRACT
In Chapter 4 we observed how firms could offer a menu of related products differentiated solely by size, or in terms of quality, and price them to increase profits, by engaging in second-degree price discrimination. For example, a car manufacturer can increase profits by offering a basic version and a fully equipped version of the same car, to take advantage of the fact that different car consumers have a different willingness-to-pay for options like air conditioning, sunroofs and higher quality stereos. In this chapter we are going to discuss how firms can also increase profits by combining only loosely related products as a bundle for sale. This practice is referred to as pure bundling. For example, a computer is usually sold with an installed operating system which is required for operation, and also word-processing software, a spreadsheet package, simple drawing and calculating software and even a few games. The computer retailer usually offers the computer onlywith a complete set of software. Alternatively, the firm may offer the bundle of goods for sale at a single price, but also allow consumers to purchase any of the individual elements of the bundle separately. This is referred to as mixed bundling. For example, if the computer company allowed a consumer to buy some of the additional software like the spreadsheet package separately aswell, theywould be practising mixed bundling. As another example, consider a restaurant which offers a banquet which includes a specified selection of entrees, mains and desserts. If the restaurant allowed diners to choose only the banquet, the restaurant would be practicing pure bundling. If the restaurant allowed customers to select a banquet, or alternatively to select their choices ‘à la carte, then the restaurant would be practising mixed bundling.
