The Role of Market Expansion on Equilibrium Bundling Strategies

TLDR: In this paper, an analytical analysis that reconciles these results by incorporating the moderating role of market expansion on equilibrium bundling strategies is presented. But the results do not paint a consistent picture.

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.