Pricing bundled information goods

Abstract

This paper contributes to the bundling literature by presenting a model to study bundling strategies for firms when the firm produces both information goods and a comparable physical world good. Two models are considered 1) Where the firm produces only information goods and 2) Where the firm produces a comparable physical good, apart from the information goods. Results suggest that a profit-maximizing firm should offer only the largest bundle, containing all the information goods. Profits for bundles containing substitute goods (sub-additive valuations), were found to be lower than the profits for bundles containing information goods whose valuations added up, when bundled together. Total profits decrease with an increase in marginal cost of the physical good. Also profits were found to increase (decrease) with an increase in the existing demand for the physical good, when the marginal cost of the physical good was low (high).