Optimal Bundling Strategies for Complements and Substitutes with Heavy-Tailed Valuations

27 Pages Posted: 8 Aug 2005

See all articles by Rustam Ibragimov

Rustam Ibragimov

Harvard University - Department of Economics

Date Written: August 2005

Abstract

We develop a framework that allows one to model the optimal bundling problem of a multiproduct monopolist providing interrelated goods with an arbitrary degree of complementarity or substitutability. Characterizations of optimal bundling strategies are derived for the seller in the case of long-tailed valuations and tastes for the products. We show, in particular, that if goods provided in a Vickrey auction or any other revenue equivalent auction are substitutes and bidders' tastes for the objects are not extremely heavy-tailed, then the monopolist prefers separate provision of the products. However, if the goods are complements and consumers' tastes are extremely thick-tailed, then the seller prefers providing the products on a single auction. We also present results on consumers' preferences over bundled auctions in the case when their valuations exhibit heavy-tailedness. In addition, we obtain characterizations of optimal bundling strategies for a monopolist who provides complements or substitutes for profit-maximizing prices to buyers with long-tailed tastes.

Keywords: Optimal bundling strategies, multiproduct monopolist, Vickrey auction, substitutes, complements, heavy-tailed valuations, tastes, robustness

JEL Classification: D42, D44, L12, L21

Suggested Citation

Ibragimov, Rustam, Optimal Bundling Strategies for Complements and Substitutes with Heavy-Tailed Valuations (August 2005). Harvard Institute of Economic Research Discussion Paper No. 2088, Available at SSRN: https://ssrn.com/abstract=775028 or http://dx.doi.org/10.2139/ssrn.775028

Rustam Ibragimov (Contact Author)

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