Option Package Bundling

Abstract

This paper analyzes the optimality of package bundling by focusing on the "main and accessory" relationship between two goods. In particular, we consider option package bundling in which an optional good is valuable only if it is consumed together with a certain (nonoptional) base good. We develop a model of option package bundling for a monopolist in which buyers' valuations are independently and uniformly distributed. We also allow inter-relationship between valuations by assuming that the reservation value of the bundle can be greater or less than the sum of the innate value of both goods. Our analysis observes that mixed bundling, in which the base good is sold with or without the optional good, yields a higher profit than pure bundling if and only if the range of the optional good valuation exceeds a threshold value. We then conduct a welfare analysis of the bundling choice. The result is surprising: pure bundling is always desirable from the social welfare viewpoint when a monopolist chooses mixed bundling.