Bundling Information Goods to Reduce Search Costs
44 Pages Posted: 4 Aug 2016 Last revised: 25 Oct 2018
Date Written: October 5, 2018
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: Suggested Citation