Bundling in Advance Sales: Theory and Evidence from Round‐Trip versus Two One‐Way Tickets*

Abstract

We theoretically derive an optimal price for a bundle of two goods that are sold in advance to risk‐averse buyers. The theory predicts that a round‐trip ticket is less expensive than two one‐way tickets when demands for the outbound and the inbound are uncertain and positively correlated. Using a unique airlines dataset, we find evidence that is consistent with the theory; round‐trip bundle discounts exist and they are larger for passengers who buy early in advance, stay on a Saturday night, and have higher valuations. We also find that the bundle discounts decrease with competition.