Bundling and Firm Reputation
Kathryn E. Spier
Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)
James D. Dana Jr.
Northeastern University - Department of Economics; Northeastern University - Department of International Business and Strategy; Harvard Business School
September 14, 2009
Harvard Law and Economics Discussion Paper No. 649
Harvard Public Law Working Paper No. 09-60
By bundling experience goods, a manufacturer can more easily maintain a reputation for high quality over time. Formally, we extend Klein and Lefler's (1981) repeated moral hazard model of product quality to consider multi-product firms and imperfect private learning by consumers. When consumers are small, receive imperfect private signals of product quality, and have heterogeneous preferences over available products, then purchasing multiple products from the same firm makes consumers more effective monitors of the firm's behavior. These consumers observe more signals of firm behavior and detect shirking with a higher probability, which creates stronger incentives for the firm to produce high quality products. By constraining all of the firm's consumers to use more effective monitoring and punishment strategies, bundling creates an even stronger incentive for a multi-product firm to produce high quality products. The impact of bundling on incentives is even greater when consumers cannot identify which of the goods is responsible for poor overall product performance.
Number of Pages in PDF File: 47
Keywords: experience goods, product quality, reputation
JEL Classification: L15, L40, K2, D82, D83
Date posted: October 1, 2009 ; Last revised: October 19, 2009