Explaining Bundle-Framing Effects with Signaling Theory

Many sellers bundle add-ons (e.g., in-flight entertainment, hotel amenities) with core services (e.g., transportation, lodging). One surprising empirical finding is that consumers often believe bundle frames provide greater value than equivalent unbundle frames ($10 > $9 + $1) despite equal all-inclusive prices. Although these context or framing effects appear irrational in isolation, the bundle-framing effect might reflect market relationships caused by underlying seller motives. We show that bundling can signal information about product appeal, that is, popularity. Specifically, only sellers of wide-appeal (popular) add-ons (e.g., well-liked entertainment, sought-after hotel amenities, standard side salads, popular excursions) have an incentive to bundle their add-ons with their core products (e.g., flights, hotel rooms, restaurant entrées, cruise trips). By contrast, sellers of narrow-appeal (niche) add-ons (e.g., unorthodox entertainment, unpopular amenities, exotic side salads, unusual excursions) find that bundling is undesirable because they lose core revenue. Consequently, bundling can convey information about horizontally differentiated markets even when the total all-inclusive price equals that of unbundling. Perhaps some presumed consumer biases can reveal market relationships. Frames provide information about the framer.