Abstract
We develop a model to derive an optimal price for a bundle of two goods when buyers are risk averse and uncertain about the valuation of each good. In theory, the optimal bundle price depends not only on the probability of a positive valuation of each good, but also on the correlation between the two valuations. We analyze a unique airlines dataset in which we directly observe the prices of both bundled (round trip ticket) and unbundled items (two one-way tickets) for identical itineraries. We find that airlines offer bundle discounts, and that these discounts increase when the correlation between outbound and inbound demands is higher. Moreover, higher certainty about demand decreases bundling discounts. We also find that bundling discounts decrease with competition.
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