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Emerging Trends in Product Bundling: Investigating Consumer Choice and Firm Behavior

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Abstract

Bundling is the practice of selling two or more products together, often at a discounted price. In this article, we extend the concept of bundling to a wide variety of choice settings. We argue that bundle choice covers consumer decision scenarios, which differ with respect to three key dimensions: the number of product categories in the bundle, the party in the distribution system who constructs the bundles, and the time frame of the bundle choice decision. These situational differences are important, from the standpoint of constructing an appropriate choice model and developing an appropriate framework for managerial decision-making. We describe five research perspectives prevalent in bundle choice research (i.e., economic, attribute-based, psychological, multi-category choice, and bundle dynamics). We provide detailed discussion of several areas of current interest: and identify unresolved issues in bundling research: understanding the multiple rationales behind bundling strategies, specification and calibration of bundle choice models, and impact of Big Data, and optimal bundle design. We conclude that bundle choice research provides rich opportunities for collaboration among economists, psychologists, and choice theory experts in marketing science.

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Notes

  1. While the US Supreme Court deemed block booking illegal, Stigler demonstrated that mixed bundling provides studios a legitimate route for increasing profit by taking into account differences in theaters’ preferences among movies.

  2. Under partitioned pricing, the seller may offer a refrigerator, say, for $399 and separately price the icemaker for $100 (see [17]). This is in contrast to offering an integrated bundle price of $499.

  3. There is also another strategy of partial-mixed bundling, wherein the firm does not sell one component good separately (see [13]).

  4. Apple’s release of its first iPhone in 2007 represented a unique amalgam of phone, camera, texting tool, and entertainment medium. Netflix began its shift from mailing DVDs to streaming video-on-demand in 2007. The opening of Facebook general use in 2006 has heralded the boom in social media alongside Twitter and other players.

  5. Price discrimination is the strategy of “offering two or more similar goods at prices that are in different ratios to marginal costs” [105].

  6. Microsoft’s launch of its Office suite in late 1988 provided one marketplace motivation for bundling, followed by the dotcom boom, bust, and recovery. Apple launched iTunes in 2001. Amazon, eBay, and Priceline, among others, helped trigger fundamental shifts in how firms define, create, and sell. More consumers and firms began to appreciate and participate in two-sided markets.

  7. In this approach, researchers need to take the issue of comparability of attributes across items in the bundle (for details, see [24]).

  8. This latter feature is new to the bundling literature and will play an important role in challenging the traditional bounds associated with when bundling reduces price inefficiencies.

  9. The article [2] shows the equivalence of bundling and advance selling. This result may open up interesting opportunities for bundling research.

  10. Several examples illustrate this discordance. These include: the practice of selling music CDs as a bundle of songs versus an Apple store selling individual songs, the practice of low-end hotels (versus high-end hotels) bundling all of their services, and the practice of airlines bundling various services for first- or business-class air tickets while charging economy passengers for the add-ons [10, 34, 98].

  11. The classic article by Hanson and Martin [45] considers the joint problem of consumers selecting multiple bundles to be their specific needs, while the firm needs to restrict the number of bundles in the product line to keep costs under control and to determine an optional price schedule; their approach provides a useful way of thinking about this problem.

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Authors and Affiliations

  1. Cornell SC Johnson College of Business, Johnson Graduate School of Management, Cornell University, Ithaca, NY, USA

    Vithala R. Rao

  2. Tippie College of Business, University of Iowa, Iowa City, IA, USA

    Gary J. Russell

  3. Graduate School of Management, University of California, Davis, CA, USA

    Hemant Bhargava

  4. Warrington College of Business, University of Florida, Gainesville, FL, USA

    Alan Cooke

  5. Tepper School of Business, Carnegie Mellon University, Pittsburgh, PA, USA

    Tim Derdenger

  6. CUHK Business School, The Chinese University of Hong Kong, Sha Tin, Hong Kong

    Hwang Kim

  7. Naveen Jindal School of Management, University of Texas at Dallas, Richardson, TX, USA

    Nanda Kumar

  8. Departments of Psychology and Marketing, University of Iowa, Iowa City, IA, USA

    Irwin Levin

  9. Desautels Faculty of Management, University of Alberta, Edmonton, AB, Canada

    Yu Ma

  10. Rotman School of Management, University of Toronto, Toronto, ON, Canada

    Nitin Mehta

  11. Alberta School of Business, University of Alberta, Edmonton, AB, Canada

    John Pracejus

  12. Joseph M. Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, PA, USA

    R. Venkatesh

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  1. Vithala R. Rao
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This paper is based on the discussions at the Bundle Choice Workshop organized by Vithala R. Rao and Gary J. Russell at the Tenth International Choice Symposium, May 2016.

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Rao, V.R., Russell, G.J., Bhargava, H. et al. Emerging Trends in Product Bundling: Investigating Consumer Choice and Firm Behavior. Cust. Need. and Solut. 5, 107–120 (2018). https://doi.org/10.1007/s40547-017-0075-x

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