This paper was written while I was a Visiting Scholar at the Harvard Department of Economics, to which I am indebted for its hospitality. I am also indebted to the Ford Motor Company for research support through a grant to MIT and to Dennis Carlton and a referee for helpful comments. For simplicity, and to permit compari sons with the earlier bundling literature, I stick with the case of inde pendent demands. Section 1 sets up the model and shows that pure bundling, as defined above, is never better for such a monopoly than simply selling its product separately. Section II shows that mixed bundling, on the other hand, may enhance profits under these assump tions.
Potential buyers are interested in at most one unit of each good.
I if and only if its price, P1, does not exceed his or her reservation price for that good, R1. Similarly, the decision to purchase the second good depends only on a comparison of P 2 and R2. Good 1 is assumed in all that follows to be produced by a competitive industry and thus to be available at price P 1 C1. Good 2 is produced by a monopoly. Now suppose that, for some reason, the monopoly elects to engage in pure bundling.