Bundling Information Goods to Reduce Search Costs

44 Pages Posted: 4 Aug 2016 Last revised: 25 Oct 2018

See all articles by R. Scott Hiller

R. Scott Hiller

Fairfield University - Department of Economics

Jason M. Walter

University of Wisconsin - Stout

Date Written: October 5, 2018

Abstract

We model the potential for a company bundling high search cost information goods to obtain an advantage over conventional individual sales. Using the streaming video industry as an example, we model the search costs associated with films. We find that bundling services can increase a user's utility from products with higher search costs, allowing a bundling service to charge a price premium in a fully served market when the reduction in search costs exceeds the consumer's disutility from the less preferred source. This implies the consumer's benefits are greatest when streaming services focus on products with high search costs. Using theatrical data and critical review data from film releases as a proxy for demand, the number of critical reviews as a proxy for search costs, and data from the Netflix streaming library, we find empirical evidence that films with higher search costs are more likely to be included in a streaming bundle.

Keywords: Bundling, information goods, streaming video, media, Netflix

JEL Classification: D12, L82, O33

Suggested Citation

Hiller, R. Scott and Walter, Jason M., Bundling Information Goods to Reduce Search Costs (October 5, 2018). Available at SSRN: https://ssrn.com/abstract=2817573 or http://dx.doi.org/10.2139/ssrn.2817573

R. Scott Hiller (Contact Author)

Fairfield University - Department of Economics ( email )

Fairfield, CT 06824
United States

Jason M. Walter

University of Wisconsin - Stout ( email )

Menomonie , WI 54751
United States

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