How Do You Know You Won't Like It if You've Never Tried It? Preference Discovery and Strategic Bundling *

Abstract

We model the interaction between a provider of composite bundles and a consumer who learns about her preferences or product quality through consumption. We show how the provider can strategically manipulate bundles to bias the consumer's learning, favoring or disfavoring certain goods, delaying learning, and boosting profits by leveraging temporary consumer biases. Using concepts from OLS estimation, decision theory, and network theory, we provide new insights about possible obfuscation strategies, and we show the role of the first and the last eigenvectors in designing policies under uncertainty. A toy empirical example from the movie industry illustrates the model's key mechanisms.

Keywords: JEL classification codes: D81 Criteria for Decision-Making under Risk and Uncertainty -D83 Search, Learning, Information and Knowledge, Communication, Belief, Unawareness -D85 Network Formation and Analysis: Theory -L12 Monopoly, Monopolization Strategies Bundling Strategies, Consumer Learning, Preference Discovery, Monopoly, Network Centrality, Ordinary Least Squares (OLS)