Economics
Bundling
Bundling is a marketing strategy where two or more products or services are offered together as a package deal. This approach is often used to increase sales and profits by offering customers a discount for purchasing multiple items at once. Bundling can also be used to promote less popular products by pairing them with more popular ones.
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11 Key excerpts on "Bundling"
eBook - PDF- Robert W. Hahn(Author)
- 2007(Publication Date)
- Brookings Institution Press and AEI(Publisher)
These, too, have been largely ignored by academics. bundle. This definition of Bundling can include the packaging of a fixed quantity of a single good as well as the packaging of two or more separate goods. There are two basic types of Bundling. The first type is pure Bundling , where the firm selling the bundle chooses only to sell the package and not the stand-alone goods. The second type of Bundling is mixed Bundling , where the firm selling the package also sells the stand-alone goods. Bundling can be achieved via price Bundling , where the bundle is sold at a discount (as in the Bundling of a hotel, rental car, and airline ticket); product Bundling , where the component goods are physically integrated to yield extra value to the buyer (for example, a high degree of interoperability in a computer oper-ating system or a suite of office software); or a combination of the two. While some authors define all types of pure Bundling as tying, Bundling has been distinguished from tying under the antitrust laws. The Supreme Court has defined tying to include those cases in which the seller conditions the sale of the tying good upon the buyer’s agreeing to purchase the tied product from him. 11 Practices by firms with monopoly power that involve such coercion can be per se illegal. Bundling and other forms of packaged sales have generally been found to lack this coercive element. The economic literature on Bundling is voluminous and has a long his-tory. Rather than attempt to comprehensively describe the literature, this section focuses on two distinct areas in which economists have studied the use of Bundling. 12 The first is the literature on the use of Bundling by a multiproduct monopolist. The second is the recent literature on the use of Bundling as an exclusionary device. The former was chosen because it nicely illustrates many of the methodological issues described above. The latter was chosen because of its potential relevance to current antitrust issues.
eBook - ePub- Robert O'Donoghue QC, Jorge Padilla, Robert O'Donoghue KC(Authors)
- 2020(Publication Date)
- Hart Publishing(Publisher)
53Economists have shown that a multi-product monopolist maximises its profits by offering a pure bundle when consumers’ valuations for the component goods are not perfectly correlated. That is, a monopolist producing A and B will maximise profits by selling the bundle A-B only, if its customers do not have the same valuations for A and B (i.e., their valuations are not perfectly and positively correlated).54 Economists have also shown that this may increase consumer welfare. However, this last result is not robust.55 This is because Bundling and tying may force some consumers to purchase more than they wish to consume, and this can create distortions in resource allocation.The intuition behind this result is clearer when the valuations for A and B are negatively correlated. Suppose there are 100 potential consumers of these two products. Suppose further that 50 customers are willing to pay €100 for product A and €20 for product B, whereas the other 50 are willing to pay €100 for product B and €20 for product A. If the monopolist were to sell A and B separately, its optimal pricing strategy would be to charge €100 for each of them. As a result, the first 50 consumers would purchase A but not B, and the remaining 50 would purchase B but no A. In that case, the monopolist profits would equal €100 × €100 = €10,000, whereas the consumers surplus would be equal to zero. Alternatively, the monopolist could have bundled A and B together, offering a pure bundle at €119. Every consumer would find it optimal to purchase the bundle. The monopolist’s profits would equal €119 × €100 = €11,900 and consumer surplus would be equal to 10.
eBook - PDFArticle 82 EC
Reflections on its Recent Evolution
- Ariel Ezrachi(Author)
- 2009(Publication Date)
- Hart Publishing(Publisher)
48 These economies of aggregation can significantly increase the profit of the firm. The increased profitability is made possible precisely because of the low (almost zero) marginal cost. The authors conclude that the firm that offers a large bundle can price it very low, which has the effect of making the entry of a single-product firm (or a firm with a small bundle) very unattractive, despite a superior cost structure or quality level. 49 41 Commission Guidance, above n 15, para 57. 42 Ibid , para 54. 43 Nevertheless, according to Nalebuff, above n 35, the value of the bundle does not seem to grow proportionately. 44 Barry Nalebuff, ‘Competing against Bundles’ (2000), Yale School of Management. 45 Commission Guidance, above n 15, para 53. 46 Nalebuff above n 44, 11–12. 47 Yannis Bakos and Erik Brynjolfsson, ‘Bundling and Competition on the Internet’ (2000) 19(1) Marketing Science 63–82. 48 Ibid , 64. 49 Ibid , 77. The authors emphasise that this entry-deterrent effect is not based on strategic behaviour, for instance by lowering the price in the short run. The incumbent chooses a price level that maximises its profits in the current period. 156 Pranvera Këllezi D. Impact on innovation Tying and Bundling can affect not only prices and the competitive structure of the market, but also innovation. Among others, Choi has explored the dynamic aspect of Bundling. 50 Extending Whinston’s model, Choi focuses on the long-term effects of tying on incentives to innovate. In contrast to earlier work, his model does not rely on the exit of rivals. Even in the absence of exit, the model shows that tying can be a profitable strategy in the long term, since it increases the tying firm’s incentive to innovate and decreases the rivals’ incentives. Tying allows a dominant firm to extend its market power from the tying to the tied good market, by expanding its market share in the latter market.
eBook - PDFInternet and Digital Economics
Principles, Methods and Applications
- Eric Brousseau, Nicolas Curien(Authors)
- 2007(Publication Date)
- Cambridge University Press(Publisher)
11.1.2 Bundling large numbers of information goods Bundling may enable a seller to extract value from a given set of goods by allowing a form of price discrimination (McAfee, McMillan and Whinston 1989 , Schmalensee 1984 ). There is an extensive literature in both the marketing and economics fields on how Bundling can be used this way (e.g., Adams and Yellen 1976 , Schmalensee 1984 , McAfee, McMillan and Whinston 1989 , Hanson and Martin 1990 , Eppen, Hanson and Martin 1991 , Salinger 1995 , Varian 1997 ). Bakos and Brynjolfsson ( 1999a ) provide a more detailed summary of the pertinent literature for large-scale Bundling of information goods. Finally, the tying literature has considered the possibility of using Bundling to lever-age monopoly power to new markets (e.g., Burstein 1960 , Bork 1978 ), with especially important contributions by Whinston ( 1990 ) on the ability of Bundling to effect foreclosure and exclusion, and related recent work (e.g., Choi 1998 , Nalebuff 1999 ). This chapter builds on prior work by Bakos and Brynjolfsson ( 1999a ) that considers the Bundling of more than two goods and is focused on Bundling information goods with zero or very low marginal cost. That article finds that in the case of large-scale Bundling of information goods, Bundling and competition on the Internet 315 the resulting economies of aggregation can significantly increase a mono-polist’s profits. The benefits of Bundling large numbers of information goods depend critically on the low marginal cost of reproducing digital information and the nature of the correlation in valuations for the goods: aggregation becomes less attractive when marginal costs are high or when valuations are highly correlated. We extend this line of research by considering how Bundling affects the pricing and marketing of goods in certain competitive settings.
eBook - PDFIndustrial Organization
Markets and Strategies
- Paul Belleflamme, Martin Peitz(Authors)
- 2015(Publication Date)
- Cambridge University Press(Publisher)
By contrast, in the second setting, the two goods are perfect complements: they are the components of a system. Two firms each offer a differentiated version of each component. Here, Bundling intensifies competition because it reduces variety and leads to lower prices through the internalization of the complementarity link between the two components. 11.3.1 Bundling as a way to soften price competition When firms produce a homogeneous product and compete in prices, they may use Bundling as a way to differentiate their products and, thereby, reduce price competition in their primary market. To formalize this idea, we extend the model of Section 11.1 in the following way. 40 We still have a unit mass of consumers who have preferences over goods A and B and who are each identified by a couple ( θ A , θ B ) drawn from the uniform distribution over the unit square. In contrast with the previous setting, we assume now that (i) good A is produced by two firms (denoted 1 and 2) at marginal cost c A < 1 and (ii) good B is produced by a perfectly competitive industry at marginal cost c B < 1. Firms 1 and 2 are also able to produce good B ; however, they will not decide to produce good B separately, as there is no profit to be made on that market. The issue is thus whether they might have an incentive to bundle good B with good A . We analyse the following two-stage game. In the first stage, the two firms choose their marketing strategy. There are three possible actions: sell good A only (specialization), sell the bundle AB only (pure Bundling), or sell both good A and the bundle (mixed Bundling). In the second stage, firms set the price(s) for the product(s) they have decided to sell. Starting with the second stage, it is quickly seen that in five out of the nine subgames, the unique Nash equilibrium (in pure strategies) is such that both firms earn zero profit.
eBook - PDFCompetition Policy and Patent Law under Uncertainty
Regulating Innovation
- Geoffrey A. Manne, Joshua D. Wright(Authors)
- 2011(Publication Date)
- Cambridge University Press(Publisher)
6 Nahata, Babu, Krzysztof Ostaszewski, and Prasanna Sahoo. 1999. “Buffet Pricing.” Journal of Business, 72, p. 2. 84 Stan J. Liebowitz and Stephen E. Margolis II. Theories of Bundling/Tie-Ins A. A Theory, of Sorts, of Pervasive Bundling As should be clear from our earlier discussion, Bundling is so common that its main purpose should be abundantly clear. Very simply, lots of things are bundled, and bundles often include lots of components because there are enormous efficiencies in Bundling. Efficiencies commonly arise on the production side, where building and shipping a multifunction device may be cheaper than building and shipping several single-function devices; think combined radios and CD players and multifunction pocket knives. The economies can also originate on the consumer side – kits for making a cake or repairing a toilet. The automobile often serves as an illustration of Bundling that occurs in competitive markets. Several writers note that standard equipment for auto- mobiles has changed over time. Heaters, air conditioners, rust proofing, and sound systems that once were optional have become standard equipment. Each of these once supported active aftermarkets. In fact, in the early days of the automobile, the “name” manufacturer often supplied only the chassis, the drivetrain, and the instrument panel, which were typically sent off as a unit to a coachworks for the addition of the car body itself. There clearly were viable markets for chasses without bodies and for bodies without chasses, so that by today’s Jefferson Parrish standard, a basic car is two goods, a running chassis and a body. An automobile manufacturer that offered only complete automobiles would be practicing a tie-in sale.
eBook - PDFIndustrial Organization
Contemporary Theory and Empirical Applications
- Lynne Pepall, Dan Richards, George Norman(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
This is definitely a case of tying. Yet the tying is not done either to price discriminate or to extend monopoly power. It is simply another result of the competitive pressure to offer low-cost medication. The idea that competition underlies much of the tying and Bundling we observe is precisely the point that Evans and Salinger (2005) and Evans (2006) make. In their view, Table 8.7 Pure Bundling as the sustainable equilibrium Demand Volume Product Pain Relief 50 Decongestant 50 Bundle 100 Costs Fixed Cost $300 $300 $300 Marginal Cost $4 $4 $7 Possible Prices Under: Separate Goods $6 $6 — Pure Bundling — — $8.5 Mixed Bundling $10 $10 $10 Bundle and Good 1 $10 — $9 Bundle and Good 2 — $10 $9 13 A review of Table 8.7 will make it clear why either mixed Bundling or offering a bundle and one good separately also cannot be an equilibrium. 204 Monopoly Power in Theory and Practice these practices are far too common to be explained either by price discrimination or monopolization motives. They note as well that even when price discrimination is the cause, the market outcome does not merit policy intervention. Hence, the only time that tying or Bundling is definitely harmful is when it is used for leveraging market power. Given that some large scale and possibly scope economies are required to make the leveraging argument powerful, these authors and others have argued that all attempts at a per se illegal rule is misguided. Instead, they call for an explicit use of a rule of reason with a general presumption that the tying is legal unless the intent and ability to extend market power is explicitly shown. 8.5 EMPIRICAL APPLICATION: Bundling IN CABLE TV As we have seen, the enhanced profitability that a firm with market power can gain from Bundling stems from reducing the variation in consumers’ willingness to pay.
eBook - PDFThe Economics of E-Commerce and Networking Decisions
Applications and Extensions of Inframarginal Analysis
- Y. Ng, H. Shi, G. Sun, Y. Ng, H. Shi, G. Sun(Authors)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
Since the general equilibrium in our model is always Pareto optimal so long as nobody can block free entry into any sector and nobody can manipulate relative prices and the numbers of specialists, the policy impli- cations of our model are straightforward. Bundling in a competitive market is efficient, and it ensures that the network effect of division of labour can be fully exploited when goods involved in the network of divi- sion of labour are associated with prohibitively high transaction costs. Hence, Bundling in a competitive market can promote aggregate produc- tivity by enlarging the scope for trading off the network effect of the divi- sion of labour on aggregate productivity, against transaction costs. Bundling per se cannot be a source of distortions in a competitive market. Bundling may generate-distortions only if it is used in connection with monopoly power. Hence, in antitrust cases such as United States v. Microsoft, attention should be placed on the possible blockage of free entry in an attempt to gain monopoly power, rather than the allegedly adverse effects of Bundling per se on welfare. To business practitioners, our model suggests that the successful Bundling of intangible e-business with some tangible ‘brick-and-mortar’ business is a key to commercial viability of e-business companies. We can usefully extend our model by making the assumption that the seller of a bundle of goods cannot choose the Bundling ratio, an assump- tion quite relevant to real e-business. We may assume that each buyer of implicitly bundled goods must allocate resources to use those goods that are free of charge. Hence, it is the buyer rather than the seller who chooses the Bundling ratio subject to her resource endowment constraint. When a firm sells information goods via a website, it usually cannot choose the Bundling ratio of goods with positive prices and goods free of charge.
eBook - ePubCompetition, Regulation, and Convergence
Current Trends in Telecommunications Policy Research
- Sharon E. Gillett, Ingo Vogelsang, Sharon E. Gillett, Ingo Vogelsang(Authors)
- 1999(Publication Date)
- Routledge(Publisher)
Moreover, it is a straightforward implication of our model that bundled pricing can serve as a deterrent to innovation. Consider the situation of Firm 2 before it invests in designing product B*. Firm 2 can anticipate that once B* hits the market, Firm 1 will bundle its products so as to render B* unprofitable. This discourages Firm 2 from making the investment at all. Even if Firm 2 would enjoy some period of delay before Firm 1 could execute the Bundling strategy, it would not be profitable to invest in the innovation as long as the delay is not too great relative to the investment cost. Hence, the conventional wisdom that Bundling by Microsoft has dampened innovation is consistent with the results of our model. When bundled pricing is precluded, there is always an equilibrium in which customers can buy their preferred product B* on an unbundled basis. This maximizes total social welfare. However, in the new buyer scenario, even precluding bundled pricing is not sufficient to alleviate exclusion, because apparently unbundled prices can perfectly mimic the bundled prices. In the latter case, structural remedies may be necessary. ACKNOWLEDGMENTS An early version of this analysis was developed as part of the authors’ work on behalf of Universal Studios, Inc., an interested party to the deliberations by the Commission of the European Communities regarding the German digital pay TV joint venture proposed by Bertelsmann and Kirch in 1997. REFERENCES Adams, W., & Yellen, J. L. (1976). Commodity Bundling and the burden of monopoly. Quarterly Journal of Economics, 90, 475–498. Bakos, Y., & Brynjolfsson, E. (1998, October). Bundling and competition on the Internet: Aggregation strategies for information goods. Paper presented at the 26 th annual Telecommunications Policy Research Conference, Alexandria, VA. McAfee, R. P., McMillan, J., & Whinston, M. D. (1989)
eBook - PDF- Kenneth D. Lawrence, Dinesh R. Pai, Kenneth D. Lawrence, Dinesh R. Pai(Authors)
- 2022(Publication Date)
- Emerald Publishing Limited(Publisher)
Finally, the chapter concludes in Section “Conclusion”. All proofs are given in the Appendix. LITERATURE REVIEW Bundling and two-sided platform are common research topics in economics and marketing. This chapter contributes to the literature on optimal Bundling strategy for two-sided platforms with indirect network externalities. One stream of research studies the optimal Bundling strategy. Adams and Yellen (1976) was among the first to analyze the Bundling problem, and a large number of scholars have studied the Bundling problem from different perspectives in different backgrounds. The research on the optimal Bundling strategy is mainly carried out from the following two perspectives. Consider Bundling in a different context. Some studies have examined the Bundling problem in the context of a monopoly firm (Honhon & Pan, 2017; Ibragimov & Walden, 2010; Stremersch & Tellis, 2002), and some Bundling problems also been studied in distribution channels or supply chain setting, for example, Chakravarty, Mild, and Taudes (2013) established equilibrium solu- tions for three different Bundling scenarios in a supply chain and found that a decentralized supply chain will gain more from Bundling when compared to a centralized supply chain. Cao, Geng, and Zhang (2015) studied retailer Bundling in a distribution channel when the manufacturer for one bundled product can strategically set the wholesale price. Chen, Yang, and Guo (2020) examined the optimal retailer-driven Bundling strategy in a distribution channel considering valuation discount affect. Our study differs from these model settings of research in that we consider the Bundling strategy in two-sided platforms under horizontal cooperation. Although the Bundling problem in the platform has received considerable attention (Guo, Zheng, Yu, & Zhang, 2021; Lin, Zhou, Xie, Zhong, & Cao, 2020), little research considered the Bundling problem between two two-sided platforms.
- Luigi Paganetto(Author)
- 2017(Publication Date)
- Taylor & Francis(Publisher)
Bundling also helps minimize selling and billing costs. Bundling allows the seller to maintain a single inventory entry for the bundle, rather than individual inventory records for each component in the package. Likewise, the seller can submit a single bill for the entire bundle, rather than a separate charge for each component.Bundling also promotes incentives for sellers to assemble supplies and other complementary goods that work well together. When a durable capital good and other complementary goods are sold separately, purchasers may buy complementary goods of inefficiently low quality, causing the capital good to operate poorly. When the inferior complements make the whole system malfunction, the manufacturer of the core good or service may suffer unwarranted damage to its reputation that may well extend to many potential customers.This issue is most likely to arise when the technology is complex, and quality differences among competing brands of the complementary goods are hard to detect. First, buyers may simply be poorly informed about the specifications of the complementary goods needed for optimum performance, Moreover, when components are sold on a stand-alone basis, sellers may have inadequate incentives to inform consumers about system requirements. This is a ‘free rider’ problem: many of the benefits of educating buyers go to sellers of complementary or competing goods, even when these sellers contribute nothing to the cost of the education campaign. Second, because some costs of damage to a manufacturer’s reputation are external to any individual buyer, even, educated buyers may buy complements of poorer quality than optimal. Bundling can reduce the informational and other free rider problems. When the same vendor sells the bundle of complementary products – ‘the system’ – the vendor can set the quality of the complementary goods at the level necessary to make the system work, and can capture (through increased sales or profits) all the benefits of educating purchasers about the requirements for proper system operation.2
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