Bundling and Menus of Two‐Part Tariffs

Inducing self‐selection among different segments of consumers is an important issue in pricing. Some firms induce self‐selection by offering a menu of two‐part tariffs (e.g., different rate plans) and letting consumers select the tariff and quantity they prefer. Other firms induce self‐selection by offering a menu of price‐quantity bundles (e.g., different package sizes) and letting consumers select only from among these bundles. We show that bundling is more profitable absent cost considerations. Social welfare may be higher or lower with bundling.