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Price bundling Essay

Most bundling studies have been done in two areas: economics and marketing. In economics, researchers have focused mainly on pricing, type of bundle, bundle composition, and bundling optimality (Adams and Yellen 1976; Guiltinan 1987; Stremersch and Tellis 2002). At the same time, research on bundling in marketing has focused mainly on buyers’ evaluations of multi-product bundles, and on psychological processes forming the basis of these evaluations (e. g. , Mulhem and Leone 1991). Summary of these issues are shown as follows. Most bundling research emphasizes price bundling.

Economists often regard price bundling as a form of imperfect price discrimination to maximize seller profits and to sort consumers into separate groups with different reservation prices (Adams and Yellen 1976). A reservation price is the price that a person is willing to pay to acquire a product (Guiltinan 1987). Since consumers vary in the maximum price they are willing to pay, sellers can use this phenomenon as an advantage to divide consumers into segments and then provide each segment with a different bundle (Adams and Yellen 1976).

In addition, price bundling allows redistribution of consumer surplus among the items in the bundle, i. e. , the difference between a product’s price and the consumer’s

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reservation price. Guiltinan (1987) suggests that the consumer surplus from the highly-valued product is transferred to the lesser-valued product. Therefore, bundling helps decrease consumers’ overall price sensitivity, resulting in a higher appeal to a larger number of consumers (Adams and Yellen 1976). Type of bundle

Adams and Yellen (1976) show that marketers can offer product bundles in two different forms: a pure bundle and a mixed bundle. Pure bundling strategy is used when sellers want to sell two or more items only in a packaged format (Monroe 1990). Schmalensee (1984) suggests that the advantage of pure bundling is it’s ability to reduce buyer heterogeneity. Therefore, pure bundling can enhance the performance of the package by focusing on incorporating among its component interfaces (Wilson et al. 1990).

In mixed bundling strategy, component items of a bundle are available separately as well as in a package (Monroe 1990). Previous research suggests that a mixed bundling option is often more profitable than the pure bundle and stand-alone options in monopolistic cases (Venkatesh and Mahajan 1993). Likewise, Philips (1981) shows that mixed bundling typically leads to higher sales than does a pure bundled or unbundled strategy (Phlips 1981). Guiltinan (1987) divides mixed bundling into two forms: mixed-leader bundling and mixed-joint bundling.

In the mixed-leader form, the price of one of the two products is discounted while the other product is purchased at the regular price. An example is “buy one, get another one half off. ” In the mixed-joint form, a single price, which is mostly less than the sum of the price of two products, is set when the two products are purchased jointly. An example is “Get 25% off the combined price when buying a computer with a printer. ” Bundle composition The selection of bundle composition is important to the success of the bundle.

The products of a bundle are often complementary in nature. Telser (1979) has demonstrated that component products can cause bundling to be profitable when they are complements rather than substitutes or unrelated products. Likewise, Harlam et al. (1995) report that bundles composed of compliments have higher purchase intent than bundles of similar or unrelated products. In addition, Yadav (1995) suggests that bundling is effective only when it does not attempt to coerce buyers to buy something they do not want.

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