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Mixed Bundling in Two-Sided Markets in the Presence of Installed Base Effects

Management Science, 59(8): 1904-1926

39 Pages Posted: 9 Feb 2011 Last revised: 4 Sep 2013

Yong Chao

University of Louisville - College of Business - Department of Economics

Timothy Derdenger

Carnegie Mellon University - David A. Tepper School of Business

Date Written: December 1, 2012

Abstract

We analyze mixed bundling in two-sided markets where installed base effects are present and find that the pricing structure deviates from traditional bundling as well as the standard two-sided markets literature - we determine prices on both sides fall with bundling. Mixed bundling acts as a price discrimination tool segmenting the market more efficiently. Consequently, as a by-product of this price discrimination, the two sides are better coordinated and social welfare is enhanced. We show unambiguously that platform participations increase on both sides of the market. After theoretically evaluating the impact mixed bundling has on prices and welfare, we take the model predictions to data from the portable video game console market. We find empirical support for all theoretical predictions.

Keywords: Mixed Bundling, Two-Sided Markets, Price Discrimination, Portable Video Game Industry

JEL Classification: D42, L12, L4, L86

Suggested Citation

Chao, Yong and Derdenger, Timothy, Mixed Bundling in Two-Sided Markets in the Presence of Installed Base Effects (December 1, 2012). Management Science, 59(8): 1904-1926. Available at SSRN: https://ssrn.com/abstract=1757214 or http://dx.doi.org/10.2139/ssrn.1757214

Yong Chao (Contact Author)

University of Louisville - College of Business - Department of Economics ( email )

Louisville, KY 40292
United States
(502)852-3573 (Phone)
(502)852-7672 (Fax)

HOME PAGE: http://yongchao.us

Timothy Derdenger

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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