The role of complementarity of goods in a mixed bundling strategy

Abstract

This paper studies optimal pricing when a monopolist firm produces two complementary goods and may undertake a bundling strategy. To do so, a modified version of Yan and Bandyopadhyay’s (2011) framework is used, in which the efficacy of the bundling strategy depends positively on the degree of complementarity, and stand-alone demands of goods may differ in price elasticity. Three main results are obtained. First, mixed bundling turns out to be the optimal strategy. Second, sales and profits from bundled (unbundled) goods increase (decrease) as the products become more complementary, which entails an empirically sensible behavior. Third, the less elastic good and a bundle may be priced equally, when the goods are highly complementary.