To Bundle or Not to Bundle: Determinants of the Profitability of Multi-Item Auctions

Abstract

Bundling, a strategy of selling multiple component products as a package for a single price, is widely practiced in today’s marketplace. This article focuses on bundling in auctions, and it investigates under what conditions it is more profitable to auction two items as a bundle vs. separately. We introduce a conceptual model that identifies determinants of the revenue of a single bundle auction relative to separate component auctions – the degree of complementarity between items, the amount of heterogeneity in bidders’ valuations, whether the components are auctioned both as a bundle and separately, and the outside availability of the individual items. The hypotheses encapsulated in this model are tested in three field experiments. The empirical evidence shows that, in the absence of complementarity, a bundle auction is less profitable than separate component auctions. However, even for relatively low levels of complementarity, bundling results in higher revenue than separate auctions, and this revenue-enhancing effect of bundling in auctions is greater for services than for tangible products. This even occurs when the outside availability of the component items is high. Finally, our results help identify the specific conditions under which mixed bundling, pure bundling, or pure component strategies maximize seller revenue from auctions.

Keywords: Auctions, Bundling, Complementarity

JEL Classification: C93, D12, M39