p.463

Bundling Decisions by a Multiproduct Monopolist with Incomplete Information

Thomas R. Palfrey

Abstract

This paper analyzes bundling decisions of a multiproduct monopolist facing uncertain demand. The monopolist sells his products using an auction mechanism and the market is analyzed as a game with incomplete information in which the buyers as well as the seller are strategic agents. With a small number of buyers, a profit maximizing seller will bundle all his output. This makes buyers uniformly worse off compared to the case where the same monopolist does not bundle, in the sense that any buyer is worse off regardless of his demand for the monopolist's outputs. With a larger number of buyers, the seller will have a tendency to unbundle his output and "high-demand" buyers are worse off than they would be if the monopolist bundled his output. "Low-demand" buyers, on the other hand, are always better off when the monopolist unbundles his output, regardless of the number of competing buyers. Despite the fact that "high demand" buyers are the typical purchasers of the monopolist's output, the net effect of increasing the number of buyers is greater market efficiency since bundling creates market inefficiencies both ex post and ex ante.