Take Action

Home | Faculty & Research Overview | Research

Research Details

Large-scale Bundle Size Pricing: A Theoretical Analysis

Abstract

Bundle size pricing (BSP) is a multi-dimensional selling mechanism where the firm prices the size of the bundle rather than the different possible combinations of bundles. In BSP, the firm offers the customer a menu of different sizes and prices. The customer then chooses the size that maximizes his surplus and customizes his bundle given his chosen size. While BSP is commonly used across several industries, little is known about the optimal BSP policy in terms of sizes and prices along with the theoretical properties of its profit. In this paper, we provide a simple and tractable theoretical framework to analyze the large-scale BSP problem where a multi-product firm is selling a large number of products. The BSP problem is in general hard as it involves optimizing over order statistics, however we show that for large numbers of products, the BSP problem transforms from a hard multi-dimensional problem to a simple multi-unit pricing problem with concave and increasing utilities. Our framework allows us to identify the main source of inefficiency of BSP that is the heterogeneity of marginal costs across products. For this reason, we propose two new BSP policies called “clustered BSP” and “assorted BSP” that significantly reduce the inefficiency of regular BSP. We then utilize our framework to study richer models of BSP such as when customers have budgets and when there exist multiple customer types.

Type

Working Paper

Author(s)

Tarek Abdallah, Josh Reed, Arash Asadpour

Date Published

2019

Citations

Abdallah, Tarek, Josh Reed, and Arash Asadpour. 2019. Large-scale Bundle Size Pricing: A Theoretical Analysis.

KELLOGG INSIGHT

Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more

COURSE CATALOG

Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.
LEARN MORE

DEGREE PROGRAMS

Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more

Take Action