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The role of market expansion on equilibrium bundling strategies

Author

Listed:
  • Praveen K. Kopalle

    (Amos Tuck School of Business Administration, Dartmouth College, Hanover, NH, USA)

  • Aradhna Krishna

    (Graduate School of Business, University of Michigan, Ann Arbor, MI, USA)

  • João L. Assunção

    (Universidade Catolica Portuguesa, Lisboa, Portugal)

Abstract

Research on optimal bundling strategy has primarily dealt with the case of a monopolist and suggests that mixed bundling be adopted, as it allows for price discrimination. The overwhelming majority of consumer products, however, operate in a competitive arena, so that an adequate description of the bundling phenomenon needs to take account of alternative competitive product offerings. A few researchers have examined the duopolistic case-two suppliers each offering a bundle composed of two complementary products. However, the collective results do not paint a consistent picture. For example, Economides (1993. Mixed bundling in duopoly. Working Paper, Stern School of Business, New York University, EC-93-29) shows that the sub-game perfect Nash equilibrium bundling strategy is to offer a mixed bundle. By contrast, Anderson and Leruth (1993. Why firms may prefer not to price discriminate via mixed bundling. International Journal of Industrial Organization 11 : 49-61), show that the solution is to offer pure components. The results of Matutes and Regibeau (1992. Compatibility and bundling of complementary goods in a duopoly. Journal of Industrial Economics 40 : 37-54) suggest that the bundling strategy depends on consumer reservation price: mixed bundling when it is low and pure components when it is high. This paper offers an analytical analysis that reconciles these results by incorporating the moderating role of market expansion on equilibrium bundling strategies. Rendering comparable the conflicting results of such prior research requires selecting a methodology that not only sufficiently allows for their unique formal specifications, but which, in the current estimate, best captures empirical phenomena of broadest interest. The focus on market expansion suggests a model of the nested logit type (see Bucklin and Gupta 1992. Brand choice, purchase incidence, and segmentation: an integrated approach. Journal of Marketing Research 29 : 201-215). It is shown that the sub-game perfect Nash equilibrium bundling strategy in a duopoly depends on the scope for market expansion, i.e., as the scope for market expansion decreases, the equilibrium bundling strategy shifts from mixed bundling to pure components. It is also shown that pure bundling will not be an equilibrium strategy. Finally, a discussion of the results when the assumption of perfect complementarity is relaxed is provided. Copyright © 1999 John Wiley & Sons, Ltd.

Suggested Citation

  • Praveen K. Kopalle & Aradhna Krishna & João L. Assunção, 1999. "The role of market expansion on equilibrium bundling strategies," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(7), pages 365-377.
    • Handle: RePEc:wly:mgtdec:v:20:y:1999:i:7:p:365-377
    DOI: 10.1002/1099-1468(199911)20:7<365::AID-MDE950>3.0.CO;2-R
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    References listed on IDEAS

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    Cited by:

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    2. Kopalle, Praveen & Biswas, Dipayan & Chintagunta, Pradeep K. & Fan, Jia & Pauwels, Koen & Ratchford, Brian T. & Sills, James A., 2009. "Retailer Pricing and Competitive Effects," Journal of Retailing, Elsevier, vol. 85(1), pages 56-70.
    3. Zhang, Guoquan & Li, Guohao & Shang, Jennifer, 2023. "Optimizing mixed bundle pricing strategy: Advance selling and consumer regret," Omega, Elsevier, vol. 115(C).
    4. Theja Tulabandhula & Deeksha Sinha & Saketh Reddy Karra & Prasoon Patidar, 2020. "Multi-Purchase Behavior: Modeling, Estimation and Optimization," Papers 2006.08055, arXiv.org, revised Aug 2023.
    5. Yuan, Hong & Krishna, Aradhna, 2008. "Pricing of mall services in the presence of sales leakage," Journal of Retailing, Elsevier, vol. 84(1), pages 95-117.
    6. Jeffrey Meyer & Venkatesh Shankar & Leonard L. Berry, 2018. "Pricing hybrid bundles by understanding the drivers of willingness to pay," Journal of the Academy of Marketing Science, Springer, vol. 46(3), pages 497-515, May.
    7. Meyer, Jeffrey & Shankar, Venkatesh, 2016. "Pricing Strategies for Hybrid Bundles: Analytical Model and Insights," Journal of Retailing, Elsevier, vol. 92(2), pages 133-146.
    8. Kulkarni, Gauri & Ratchford, Brian T. & Kannan, P.K., 2012. "The Impact of Online and Offline Information Sources on Automobile Choice Behavior," Journal of Interactive Marketing, Elsevier, vol. 26(3), pages 167-175.
    9. Zhou, Shu & Song, Boqian & Gavirneni, Srinagesh, 2020. "Bundling decisions in a two-product duopoly – Lead or follow?," European Journal of Operational Research, Elsevier, vol. 284(3), pages 980-989.
    10. Kamel Jedidi & Sharan Jagpal & Puneet Manchanda, 2003. "Measuring Heterogeneous Reservation Prices for Product Bundles," Marketing Science, INFORMS, vol. 22(1), pages 107-130, July.
    11. Grewal, Dhruv & Levy, Michael & Kumar, V., 2009. "Customer Experience Management in Retailing: An Organizing Framework," Journal of Retailing, Elsevier, vol. 85(1), pages 1-14.
    12. Ashutosh Prasad & R. Venkatesh & Vijay Mahajan, 2010. "Optimal Bundling of Technological Products with Network Externality," Management Science, INFORMS, vol. 56(12), pages 2224-2236, December.

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