Product bundling or reserved product pricing? Price discrimination with myopic and strategic consumers

Mixed bundling (MB), in which products are sold separately and as a bundle, is a form of second degree price discrimination. In this study we examine how MB and its variants compare against reserved product pricing (RPP), a form of co-promotion. Used by Amazon.com, among others, RPP consists of the firm offering individual products and then enticing single product buyers with a discount on the second product. Our analytical model has a monopolist offering two products to a mix of myopic and strategic consumers. We find that as long as the market consists of a “modest” fraction of myopic consumers, RPP is more profitable than mixed bundling and its special cases. We also present pricing results under RPP. An extension shows that RPP can also be more profitable than a form of price skimming. Limitations and future research directions are discussed.