The Role of Market Expansion on Equilibrium Bundling Strategies

Managerial and Decision Economics, 20 (7), 365-377, 1999

Tuck School of Business Working Paper No. 2552253

13 Pages Posted: 21 Jan 2015

See all articles by Praveen K. Kopalle

Praveen K. Kopalle

Dartmouth College - Tuck School of Business

Aradhna Krishna

University of Michigan, Stephen M. Ross School of Business

Joao Assuncao

Catholic University of Portugal (UCP)

Date Written: 1999

Abstract

Research on optimal bundling strategy has primarily dealt with the case of a monopolist and suggests that mixed bundling be adopted, as it allows for price discrimination. The overwhelming majority of consumer products, however, operate in a competitive arena, so that an adequate description of the bundling phenomenon needs to take account of alternative competitive product offerings. A few researchers have examined the duopolistic case — two suppliers each offering a bundle composed of two complementary products. However, the collective results do not paint a consistent picture. For example, Economides (1993. Mixed bundling in duopoly. Working Paper, Stern School of Business, New York University, EC-93-29) shows that the sub-game perfect Nash equilibrium bundling strategy is to offer a mixed bundle. By contrast, Anderson and Leruth (1993. Why firms may prefer not to price discriminate via mixed bundling. International Journal of Industrial Organization 11: 49-61), show that the solution is to offer pure components. The results of Matutes and Regibeau (1992. Compatibility and bundling of complementary goods in a duopoly. Journal of Industrial Economics 40: 37-54) suggest that the bundling strategy depends on consumer reservation price: mixed bundling when it is low and pure components when it is high. This paper offers an analytical analysis that reconciles these results by incorporating the moderating role of market expansion on equilibrium bundling strategies. Rendering comparable the conflicting results of such prior research requires selecting a methodology that not only sufficiently allows for their unique formal specifications, but which, in the current estimate, best captures empirical phenomena of broadest interest. The focus on market expansion suggests a model of the nested logit type (see Bucklin and Gupta 1992. Brand choice, purchase incidence, and segmentation: an integrated approach. Journal of Marketing Research 29: 201-215). It is shown that the sub-game perfect Nash equilibrium bundling strategy in a duopoly depends on the scope for market expansion, i.e., as the scope for market expansion decreases, the equilibrium bundling strategy shifts from mixed bundling to pure components. It is also shown that pure bundling will not be an equilibrium strategy. Finally, a discussion of the results when the assumption of perfect complementarity is relaxed is provided.

Suggested Citation

Kopalle, Praveen K. and Krishna, Aradhna and Assuncao, Joao, The Role of Market Expansion on Equilibrium Bundling Strategies (1999). Managerial and Decision Economics, 20 (7), 365-377, 1999, Tuck School of Business Working Paper No. 2552253, Available at SSRN: https://ssrn.com/abstract=2552253

Praveen K. Kopalle

Dartmouth College - Tuck School of Business ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-3612 (Phone)
603-646-1308 (Fax)

Aradhna Krishna (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Joao Assuncao

Catholic University of Portugal (UCP) ( email )

Palma de Cima
Lisboa, 1649-023
Portugal

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