Bundling Customers: How to Exploit Trust Among Customers to Maximize Seller Profit

Abstract

We consider an auction of identical digital goods to customers whose valuations are drawn independently from known distributions. Myerson's classic result identifies the truthful mechanism that maximizes the seller's expected profit. Under the assumption that in small groups customers can learn each others' valuations, we show how Myerson's result can be improved to yield a higher payoff to the seller using a mechanism that offers groups of customers to buy bundles of items.

11 pages, 1 figure. After posting the first version of this paper we learned that much of its mathematical content already appears in the literature, for example in "Multiproduct nonlinear pricing" by Armstrong (1996), although in a slightly different context of bundling products, rather than customers