Research Note—Competitive Bundling and Counterbundling with Generalist and Specialist Firms

Abstract

Bundling, which is the practice of selling two or more products or services in a package, is a pervasive marketing practice and is often used as a strategic competitive tool. However, there has not been enough consideration of competitive bundling situations in which exit of a competitor is not a concern. In this paper, we address this issue by identifying conditions under which strategic competitors may or may not resort to bundling when competitor exit considerations are absent. We study competition between a multiproduct generalist firm and two single-product specialist firms in two product categories, one of which has undifferentiated products and the other has differentiated products. In our model, the specialist firms can form an alliance to bundle their products in competing with the generalist firm. In contrast to the previous literature, we find that concurrent bundling by competitors, if it occurs in equilibrium, is profitable. We also find that when one competitor bundles and the other does not, the bundling firm gains a greater share of customers and makes a higher profit. However, when conditions favor counterbundling by a competitor, such counterbundling helps the competitor retain its customers. Finally, we note that under other market conditions, concurrent bundling by competitors escalates price competition to the extent that retaining customers through bundling is not profitable. In such a case, we show that strategic competitors are better off having asymmetric product lines with one competitor bundling and the other selling unbundled.

Strategic Role of Retailer Bundling in a Distribution Channel

“…Besides monopolistic bundling, the bundling literature also studies oligopolistic bundling and tying where there are two or more retailers. This stream of literature shows how a firm can use bundling as a competition tool from different perspectives: bundling can leverage a firm's monopolistic power in one market into another oligopolistic market (Whinston 1990), soften competition (Anderson and Leruth 1993;Balachander, Ghosh, and Stock 2010;Chen 1997;Ghosh and Balachander 2007), or deter entrance (Nalebuff 2004;Wilson, Weiss, and John 1990). See Stremersch and Tellis (2002) and Venkatesh and Mahajan (2009) for comprehensive reviews of the bundling literature.…”

“…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.…”

Consumer Taste Uncertainty in the Context of Store Brand and National Brand Competition

“…As a result, offering a generic product is the only way to appeal to both segments. Note that this is in alignment with the idea of a generic versus specialized product (Ghosh and Balachander 2007). The mathematical translation of our assumption is t ≥ 1.…”

Analysis of pricing strategies for community-based group buying: The impact of competition and waiting cost

“…Recent literature (Carbajo et al 1990;Matutes and Regibeau 1992;Chen 1997;Ghosh and Balachander 2007) has studied the bundling strategies of oligopolistic retailers. Most of them identify conditions under which one or both of the duopolistic retailers may or may not resort to bundling.…”