Optimal Bundle Pricing

Abstract

Bundle pricing is a widespread phenomenon. However, despite its importance as a pricing tool, surprisingly little is known about how to find optimal bundle prices. Most discussions in the literature are restricted to only two components, and even in this case no algorithm is given for setting prices. Here we show that the single firm bundle pricing problem is naturally viewed as a disjunctive program which is formulated as a mixed integer linear program. Multiple components, and a variety of cost and reservation price conditions are investigated with this approach. Several new economic insights on the role and effectiveness of bundling are presented. An added benefit of the solution to the bundle pricing model is the selection of products which compose the firm's product line. Computational testing is done on problems with up to 21 components (over one million potential product bundles), and data collection issues are addressed.

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