The role of market expansion on equilibrium bundling strategies

Kopalle, Praveen K.; Krishna, Aradhna; Assunção, João L.

doi:10.1002/1099-1468(199911)20:7<365::aid-mde950>3.0.co;2-r

Cited by 23 publications

(11 citation statements)

References 29 publications

(32 reference statements)

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“…Introducing competition, where buyers desiring to purchase, say, the premium product have a choice of multiple sellers, adds interesting nuances. There is current literature (Economides 1993, Kopalle et al 1999, Matutes and Regibeau 1992 that has studied bundling in the presence of competition. However, this research assumes complementary products, not a vertically differentiated market, and this literature does not account for scarce resources.…”

Section: Discussionmentioning

confidence: 99%

Bundling Strategies When Products Are Vertically Differentiated and Capacities Are Limited

2010

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We consider a seller who owns two capacity-constrained resources and markets two products (components) corresponding to these resources as well as a bundle comprising the two components. In an environment where all customers agree that one of the two components is of higher quality than the other and that the bundle is of the highest quality, we derive the seller's optimal bundling strategy. We demonstrate that the optimal solution depends on the absolute and relative availabilities of the two resources as well as upon the extent of subadditivity of the quality of the products. The possible strategies that can arise as equilibrium behavior include a pure components strategy, a partial- or full-spectrum mixed bundling strategy, and a pure bundling strategy, where the latter strategy is optimal when capacities are unconstrained. These conclusions are contrary to findings in the prior literature on bundling that demonstrated the unambiguous dominance of the full-spectrum mixed bundling strategy. Thus, our work expands the frontier of bundling to an environment with vertically differentiated components and limited resources. We also explore how the bundling strategies change as we introduce an element of horizontal differentiation wherein different types of customers value the available components differently.vertical differentiation, limited resources, bundle pricing, mixed bundling, revenue management

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Section: Discussionmentioning

confidence: 99%

Bundling Strategies When Products Are Vertically Differentiated and Capacities Are Limited

2010

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“…Tie-in sales and entry deterrence IBM bundling tabulating machines and cards Carbajo et al (1990); Whinston (1990) Aggregation to reduce buyer heterogeneity A larger aggregator of information goods outbidding a smaller competitor Bakos and Brynjolfsson (2000) Enabling competition through unbundling to facilitate market growth High-end manufacturer de-linking the sales of stereo receivers and speakers Wilson et al (1990); Kopalle et al (1999) analytical details as much as possible. Finally, we overlook a nascent stream of bundling research in marketing that is motivated by behavioral decision theory.…”

Section: Competitor-side Rationalesmentioning

confidence: 99%

“…Double exponential distribution (e.g. Anderson and Leruth, 1992;Kopalle et al, 1999) The appeal of random utility theory and logit choice models extends to bundling. Several articles on competition in bundling are rooted in this framework and model heterogeneity through the double-exponential distribution.…”

Section: Correlation In Reservation Pricesmentioning

confidence: 99%

The Design and Pricing of Bundles: A Review of Normative Guidelines and Practical Approaches

Venkatesh

Mahajan²

2009

Handbook of Pricing Research in Marketing

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Bundling, the strategy of marketing products in particular combinations, is growing in significance given the boom in high technology and e-commerce. The seller in these instances typically has to decide which form of bundling to pursue and how to price the bundle and the individual products. We have written this chapter with two main objectives. First, we have sought to draw a set of key guidelines for bundling and pricing from a large body of 'traditional' literature rooted in stylized economic models. Here we have considered factors such as the nature of heterogeneity in consumers' reservation prices, the extent of the underlying correlation in reservation prices, the degree of complementarity or substitutability, and the nature of competition. The key conclusion is that no one form of bundling is always the best. Second, we have attempted to showcase the extant methodologies for bundle design and pricing. The studies that we have considered here have an empirical character and pertain to issues of a 'marketing' nature. In the concluding section, we suggest other avenues for expanding this work. * The authors thank Vithala Rao and an anonymous reviewer for helpful comments on an earlier version of the chapter. 1 Multipart tariff, another form of nonlinear pricing, is the focus of Chapter 16 in this volume. 2 Although pure components and unbundling are essentially the same, Venkatesh and Chatterjee (2006, p. 22) note that unbundling represents 'the strategic uncoupling of a composite product (e.g., a news magazine) into its components'. Pure components is then the slight contrast of offering two naturally separate products in their standalone form. The design and pricing of bundles 233 could be bundles of brands (e.g. Diet Coke with NutraSweet) with more than one vested seller for a product. We have written this chapter with two main objectives. First, we have sought to draw a set of key guidelines for bundling and pricing from a large body of 'traditional' literature rooted in stylized economic models. Second, we have attempted to showcase the work of marketing scholars. This work emphasizes practical approaches to bundle design and pricing, and includes problems of a 'marketing' nature. The classical work on bundling by economists has predominantly been of a normative nature. Related studies have examined the role of fi rm-side drivers such as reduced inventory holding costs by restricting product range (e.g. Eppen et al., 1991), lower sorting and processing costs (e.g. Kenney and Klein, 1983), and greater economies of scope (e.g. Baumol et al., 1982). Price discrimination is the most widely recognized demandside rationale for (mixed) bundling (e.g. Adams and Yellen, 1976; McAfee et al., 1989; Schmalensee, 1984). Other demand-side drivers include buyers' variety-seeking needs (e.g. McAlister, 1982), desire to reduce risk and/or search costs (e.g. Hayes, 1987), and product interrelatedness in terms of substitutability and complementarity (e.g. Lewbel, 1985). Competitor-driven considerations are most notably li...

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“…In such a context a mixed-bundling strategy is, at the very least, never strictly dominated by other forms of bundling. Whether (pure versus mixed) bundling or unbundling is optimal in more competitive environments remains unclear -studies on duopoly situations do not paint a consistent picture (e.g., Anderson and Leruth 1993;Economides 1993;Kopalle, Krishna and Assunção 1999).…”

mentioning

confidence: 99%

Bye-Bye Bundles: The Unbundling of Music in Digital Channels

Elberse

2010

Journal of Marketing

150

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Fueled by digital distribution, unbundling is prevalent in many information and entertainment industries. What is the effect of this unbundling on sales, and what bundle characteristics drive this effect? I empirically examine these questions in the context of the music industry, using data on weekly digital-track, digital-album, and physical-album sales from January 2005 to April 2007 for all titles released by a sample of over 200 artists. My modeling framework, a system of an "album-sales" and a "song-sales" equation estimated using the seemingly-unrelated-regression method, explicitly accounts for the interaction between sales for the bundle and its components. I find that revenues decrease significantly as digital downloading becomes more prevalent, but that the number of items included in a bundle (a measure of its "objective" value) is not a significant moderator of this effect.Instead, I find that bundles with items that are more equal in their appeal and bundles offered by producers with a strong reputation suffer less from the negative impact of the shift to mixed bundling in online channels.

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The role of market expansion on equilibrium bundling strategies

Cited by 23 publications

References 29 publications

Bundling Strategies When Products Are Vertically Differentiated and Capacities Are Limited

Bundling Strategies When Products Are Vertically Differentiated and Capacities Are Limited

The Design and Pricing of Bundles: A Review of Normative Guidelines and Practical Approaches

Bye-Bye Bundles: The Unbundling of Music in Digital Channels

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