Competitive Bundling and Counterbundling with Generalist and Specialist Firms

Management Science, Vol. 53, No. 1, pp. 159–168, January 2007

Posted: 13 Jun 2011

See all articles by Bikram Ghosh

Bikram Ghosh

University of South Carolina

Subramanian Balachander

University of California, Riverside - School of Business Administration

Date Written: January 2007

Abstract

Bundling, which is the practice of selling two or more products or services in a package, is a pervasive marketing practice and is often used as a strategic competitive tool. However, there has not been enough consideration of competitive bundling situations in which exit of a competitor is not a concern. In this paper, we address this issue by identifying conditions under which strategic competitors may or may not resort to bundling when competitor exit considerations are absent. We study competition between a multiproduct generalist firm and two single-product specialist firms in two product categories, one of which has undifferentiated products and the other has differentiated products. In our model, the specialist firms can form an alliance to bundle their products in competing with the generalist firm. In contrast to the previous literature, we find that concurrent bundling by competitors, if it occurs in equilibrium, is profitable. We also find that when one competitor bundles and the other does not, the bundling firm gains a greater share of customers and makes a higher profit. However, when conditions favor counterbundling by a competitor, such counterbundling helps the competitor retain its customers. Finally, we note that under other market conditions, concurrent bundling by competitors escalates price competition to the extent that retaining customers through bundling is not profitable. In such a case, we show that strategic competitors are better off having asymmetric product lines with one competitor bundling and the other selling unbundled.

Keywords: game theory, bundling, pricing, marketing, industrial organization

JEL Classification: M31, L1

Suggested Citation

Ghosh, Bikram and Balachander, Subramanian, Competitive Bundling and Counterbundling with Generalist and Specialist Firms (January 2007). Management Science, Vol. 53, No. 1, pp. 159–168, January 2007. Available at SSRN: https://ssrn.com/abstract=1863245

Bikram Ghosh

University of South Carolina ( email )

701 Main Street
Columbia, SC 29208
United States

Subramanian Balachander (Contact Author)

University of California, Riverside - School of Business Administration ( email )

United States

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