Abstract
This article explores the practice of bundling a free unit of good y (drink) with a threshold purchase of good x (food). Allowing for heterogeneity in consumer drink preferences we characterize the conditions under which the practice is strictly more profitable than linear pricing. An increase in food sales is the source of higher profits. Selection issues reduce profitable opportunities in heterogeneous populations of consumers relative to homogeneous populations. In some cases, an increase in profit from using the practice can be higher when consumers would not otherwise buy the drink. When heterogeneity is further extended to consumer food preferences similar results emerge from numerical calculations. The practice can be Pareto-improving if the seller has limited control over prices.
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