Edited by Joseph E. Harrington Jr and Yannis Katsoulacos
5. Optimal decisions in two-stage bundling Xeni Dassiou and Dionysius Glycopantis 5.1 INTRODUCTION Bundling has been discussed as an instrument of second degree price discrimination with distinct original contributions by a number of authors. Among them are Adams and Yellen (1976), McAfee et al. (1989) and Schmalensee (1984). There is also an original contribution by Stigler (1968). Typically a uniform distribution was used to describe the valuation of consumers for two goods. On the other hand, Schmalensee used the bivariate normal distribution. In Dassiou and Glycopantis (2006, 2008), using the uniform distribution we show that mixed bundling (where the consumers self-select among buying neither good, only one good or both goods bundled together) leads to an increase in profits and if practised by a monopsonist to an increase in trade for its trading partners. The discussions in the literature have produced concrete results. We refer to these and where appropriate we explain the contribution in the present chapter. We assume that the buyers’ valuations of the two goods are distributed according to a bivariate normal distribution. The monopolist firm uses a pure bundling approach through the construction of a composite good. We will explain this approach in detail below. Bundling increases the proportion of valuations around the mean by reducing the dispersion among the buyers. While this is good news in the case of low marginal costs, in the opposite case the seller will want to increase rather than decrease the dispersion of valuations. This is because if the marginal...
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