Optimal Decisions in Two-stage Bundling

Abstract

We develop a generalised framework for pure bundling where buyer tastes for two goods are assumed to follow a normal distribution. In the literature optimal bundling decisions have been considered under the assumption that the weights of the two goods are …xed and equal. The only consideration is then to choose the pro…t maximising optimal price. Our approach is di¤erent and much more realistic. The monopolist …rst decides on the optimal weights of the two goods and in the second stage derives the pro…t maximising bundle price. Welfare and policy implications of our approach are derived and comparisons are made with those of the …xed weights approach.