Optimal Bundling of Technological Products with Network Externality

Abstract

For many high-tech and Internet-related products, utility to consumers depends in part on the size of the user base, a phenomenon called network externality. A firm with a portfolio of these and other products--that are often asymmetric in their degree of network externality or marginal cost--may have to look beyond the traditional strategies of pure components, pure bundling, and mixed bundling. One such strategic alternative in a two-product case would be a so-called mixed bundling-1 under which the bundle and product 1 are offered, but the other product can only be purchased in a bundled form. The purpose of this study is to compare and contrast the impact of such asymmetry or symmetry in (direct) network externality and cost on the choice of bundling strategies. We model a monopolist firm that has a product in each of two categories and faces heterogeneous consumers. Results suggest that pure bundling is more profitable when both products have low marginal costs or high network externality whereas pure components or mixed bundling-1 is more profitable when the products diverge in their costs and network externality (e.g., only one product has network externality). Traditional mixed bundling is optimal in other instances.bundling, network externality, pricing, high technology, eCommerce

Strategic Role of Retailer Bundling in a Distribution Channel

“…In the context of monopolistic bundling, a number of papers study the optimal bundling strategy in different contexts: when the number of products in a bundle is two (Adams and Yellen 1976;Schmalensee 1984), very large (Armstrong 1999) or finite (Fang and Norman 2005), when component products are complements or substitutes (Venkatesh and Kamakura 2003), when consumers differ in their abilities of assessing the value of a component product (Basu and Vitharana 2009), when the seller auctions off his products (Subramaniam and Venkatesh 2009), when component products are vertically differentiated and production capacity is limited (Banciu, GalOr, and Mirchandani 2010), when the distribution of consumer valuation is heavy-tailed (Ibragimov and Walden 2010), and when products have network externality (Prasad, Venkatesh, and Mahajan 2010). Besides monopolistic bundling, the bundling literature also studies oligopolistic bundling and tying where there are two or more retailers.…”

“…Extant literature highlights two reasons why a firm bundles: bundling results in better price discrimination against consumers (Adams and Yellen 1976;Banciu, Gal-Or, and Mirchandani 2010;Basu and Vitharana 2009;Fang and Norman 2005;Mcafee, Mcmillan, and Whinston 1989;Prasad, Venkatesh, and Mahajan 2010;Schmalensee 1984), and bundling serves as an effective competition tool (Balachander, Ghosh, and Stock 2010;Chen 1997;Ghosh and Balachander 2007;Nalebuff 2004;Whinston 1990). Our first finding complements the above two streams of research by offering a new rationale for product bundling.…”

The Dynamic Effects of Bundling as a Product Strategy

“…Recent research on mixed bundling indicates that this strategy is likely to be more profitable when the products to be bundled are sufficiently asymmetric in production costs as well as network effects [Prasad et al, 2010], whereas more similarity between products makes pure bundling or pure components profitable. It is noteworthy that the authors point to the lack of empirical research at the confluence of network effects and bundling, echoing more general calls for an empirical measurement of the market effects of bundling [Kobayashi, 2005].…”

Optimization of the Annual Planning of Targeted Offers in Direct Marketing

“…Adams and Yellen (1976) identify three bundling strategies: the "pure component" strategy, which is the offer of products only as separate items; the "mixed bundling" strategy that combines both individual products and their bundles; and the "pure bundling" strategy that offers only packages of products. The marketing and economic literature has mainly focused on the problem of choosing an optimal bundling strategy (Adams and Yellen, 1976;Bakos and Brynjolfsson, 1999;Banciu and Prakash Mirchandani, 2010;Ibragimov and Walden, 2010;Prasad et al, 2010). Our model does not take the bundling strategy as a variable but rather adopts the mixed bundling strategy to comply with Belgian legislation.…”