Multiproduct Monopoly, Commodity Bundling, and Correlation of Values

Through what selling strategy can a multiproduct monopolist maximize his profits when his knowledge about individual consumers' preferences is limited? One possibility, extensively studied in the context of a single-good monopoly, is to use quantity-dependent pricing as a means of discriminating among customers with differing tastes (see, for example, Oi [1971] and Maskin and Riley [1984]). An alternative technique for price discrimination, first suggested by Stigler [1968] and analyzed further by Adams and Yellen [1976], is for the monopolist to package two or more products in bundles rather than selling them separately.' Through a series of examples Adams and Yellen illustrate that bundling can serve as a useful price discrimination device, even when all consumers' willingnesses to pay for each of the goods individually are unaffected by whether they are also consuming the other product. A typical example is illustrated in Figure I (adapted from Figure IV in Adams and Yellen), where there are two goods, three consumers (AB,C) who consume at most one unit of each good (with reservation values for each good that are independent of whether the other good is consumed), and zero costs of production. There, a bundle offered at a price of 100 fully extracts all potential surplus, which would be impossible pricing the goods independently. Unfortunately, though, these authors do not provide any general characterization of the circumstances in which bundling is actually a multiproduct monopolist's optimal strategy. Their examples, however (such as Figure I), create the impression that the profitable use of bundling