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Bundling and Firm Reputation

47 Pages Posted: 1 Oct 2009 Last revised: 19 Oct 2009

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

Date Written: September 14, 2009

Abstract

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.

Keywords: experience goods, product quality, reputation

JEL Classification: L15, L40, K2, D82, D83

Suggested Citation

Spier, Kathryn E. and Dana, James D., Bundling and Firm Reputation (September 14, 2009). Harvard Law and Economics Discussion Paper No. 649; Harvard Public Law Working Paper No. 09-60. Available at SSRN: https://ssrn.com/abstract=1480325 or http://dx.doi.org/10.2139/ssrn.1480325

Kathryn E. Spier (Contact Author)

Harvard University - Law School - Faculty ( email )

1575 Massachusetts
Hauser 302
Cambridge, MA 02138
United States
(617) 496-0019 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James D. Dana Jr.

Northeastern University - Department of Economics ( email )

301 Lake Hall
Boston, MA 02115
United States
617-373-7517 (Phone)

HOME PAGE: http://www.economics.neu.edu/dana/

Northeastern University - Department of International Business and Strategy

360 Huntington Ave
Boston, MA 02115
United States

Harvard Business School ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617-495-6958 (Phone)

HOME PAGE: http://www.hbs.edu/faculty/Pages/profile.aspx?facId=438792

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