Comments on "Gaussian Demand and Commodity Bundling"

Abstract

Richard Schmalensee's paper deals with commodity bundling, that is, the selling of goods or services in packages. The paper is particularly interesting to those who study and/or manage the marketing function. Indeed, selling of goods or services in packages is a very common marketing strategy. Examples include vacation packages, season tickets (concerts, sports, theater, etc.), and complete dinners. There are two forms of bundling strategies: pure bundling, if goods are sold only in packages, and mixed bundling, if goods are sold separately as well as in packages (e.g., ordering a la carte vs. a whole dinner). Bundles sometimes include goods or services that cannot be sold separately: luxury in a car is tied to transportation services; a brand name cannot be sold alone (see Adams and Yellen 1976). These authors also mention that selling different sizes is a form of commodity bundling. If two sizes of a product are sold, a small size s and a large size S, the offering (s, S) is a form of mixed commodity bundling: the quantity S s is not offered separately but only as part of the bundle S. In the past, the explanation of commodity bundling focused on cost savings in production, transactions, or complementarity of bundle components. Stigler (1963) first articulated the idea that the profitability of commodity bundling can stem from its ability to sort customers into groups with different reservation-price characteristics and hence to extract consumer surplus. Adams and Yellen (1976) discussed this sorting of consumers. Figure 1 describes the case of selling each good independently. Any individual with reservation prices (rl, r2) for the two goods falls into one of four regions: 0 are nonbuyers (r1 Pi, r2 (PI + P2). Finally, mixed bundling is shown in figure 3. Region 1 individuals buy 1 only, because r, > Pi but r2 < (PB -