Why Bundle Discounts Can Be a Profitable Alternative to Competing on Price Promotions

Marketing Science, Vol. 29, No. 4, pp. 624–638, July-August 2010

Posted: 13 Jun 2011

See all articles by Subramanian Balachander

Subramanian Balachander

University of California, Riverside - School of Business Administration

Bikram Ghosh

University of South Carolina

Axel Stock

University of Central Florida

Date Written: July 2010

Abstract

Price promotions and bundling have been two of the most widely used marketing tools in industry practice. Past literature has assumed that firms respond to price promotions by promoting a product in the same category. In this paper, we extend this literature as well as the bundling literature by considering the possibility that a firm may respond to a competitor’s price promotions by also offering a cross-buying or bundling discount. Using a game-theoretic model, we show that bundle discounts can help increase profits in a competitive market by creating endogenous loyalty, thereby reducing the intensity of promotional competition. We also find that bundle discounts can be used as an effective defensive marketing tool to prevent customer defection to the competition.

Keywords: bundling, game theory, price promotions, brand loyalty, marketing, industrial organization

JEL Classification: M31, L1

Suggested Citation

Balachander, Subramanian and Ghosh, Bikram and Stock, Axel, Why Bundle Discounts Can Be a Profitable Alternative to Competing on Price Promotions (July 2010). Marketing Science, Vol. 29, No. 4, pp. 624–638, July-August 2010, Available at SSRN: https://ssrn.com/abstract=1863264

Subramanian Balachander (Contact Author)

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

United States

Bikram Ghosh

University of South Carolina ( email )

701 Main Street
Columbia, SC 29208
United States

Axel Stock

University of Central Florida ( email )

4000 Central Florida Blvd
Orlando, FL 32816-1400
United States

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