Non-Linear Pricing with Homogeneous Customers and Limited Unbundling (Discussion Paper 2010-04)

Abstract

This paper presents a model in which a firm conducts non-linear pricing though bundling. However some agents, ‘unbundlers’, find it profitable to unbundle output. Unbundlers have an increasing marginal cost of unbundling, which limits the extent of unbundling. Customers with identical demand can purchase either bundled or unbundled output. In equilibrium, some consumers purchase bundled output and others unbundled output. The analysis shows how the extent of unbundling and the optimal bundle size are related to the cost of unbundling. Failing to account for presence of unbundling could lead to a misinterpretation of market efficiency.