A GRAPHICAL ANALYSIS OF BUNDLING

By comparing the demand for a bundle and the vertical sum of the demands for its components, this article analyzes the profitability and welfare consequences of bundling. If it does not lower costs, bundling tends to be profitable when reservation values are negatively correlated and high relative to costs. If bundling lowers costs and costs are high relative to average reservation values, positively correlated reservation values increase the incentive to bundle. Bundling and charging a price equal to the sum of the components' prices lowers consumer surplus. Bundling can, however, increase consumer surplus when it results in lower prices.