Research Note - Impact of Customer Knowledge Heterogeneity on Bundling Strategy

We consider a marketer of components who can select one of three alternative pricing strategies: 1 a pure component strategy i.e., the customer can only buy the components individually, 2 a pure bundling strategy i.e., the components must be purchased together, or 3 a mixed bundling strategy i.e., the customer may buy a component individually, or buy the bundle. We consider a market where customer knowledge of components varies and propose that a high-knowledge customer can determine with greater certainty whether a given component is useful to her. Consequently, more knowledgeable customers have higher variability in their reservation price of a component. Using an analytical model, we identify the conditions under which each of the three pricing strategies maximizes profit and show that three factors determine the optimal strategy: marginal costs of components, distribution of knowledge over the customer population, and relative sizes of customer segments where each segment is interested in the same subset of components. Managerial implications and directions for future research are discussed.

[1]  Andrew B. Whinston,et al.  Bundling Information Goods of Decreasing Value , 2005, Manag. Sci..

[2]  E. Blair,et al.  Consumer preference for product bundles: The role of reduced search costs , 2006 .

[3]  G. Tellis,et al.  Strategic Bundling of Products and Prices: A New Synthesis for Marketing , 2002 .

[4]  Rabikar Chatterjee,et al.  Bundling, unbundling, and pricing of multiform products: The case of magazine content , 2006 .

[5]  Janet L. Yellen,et al.  Commodity Bundling and the Burden of Monopoly , 1976 .

[6]  J. W. Hutchinson,et al.  Dimensions of Consumer Expertise , 1987 .

[7]  Yannis Bakos,et al.  Bundling Information Goods: Pricing, Profits and Efficiency , 1998 .

[8]  W. Kamakura,et al.  Optimal Bundling and Pricing Under a Monopoly: Contrasting Complements and Substitutes from Independently Valued Products , 2003 .

[9]  Bernard L. Simonin,et al.  Bundling as a strategy for new product introduction: Effects on consumers' reservation prices for the bundle, the new product, and its tie-in , 1995 .

[10]  Ramesh Sankaranarayanan,et al.  Innovation and the Durable Goods Monopolist: The Optimality of Frequent New-Version Releases , 2007 .

[11]  Tuck Siong Chung,et al.  Marketing Models of Service and Relationships , 2006 .

[12]  Ward Hanson,et al.  Optimal bundle pricing , 1990 .

[13]  Bikram Ghosh,et al.  Research Note - Competitive Bundling and Counterbundling with Generalist and Specialist Firms , 2007, Manag. Sci..

[14]  K. B. Monroe,et al.  How Buyers Perceive Savings in a Bundle Price: An Examination of a Bundle's Transaction Value: , 1993 .

[15]  Steven M. Shugan,et al.  Managing Service Demand , 1998 .

[16]  Eppen Gd,et al.  Bundling--new products, new markets, low risk. , 1991 .

[17]  Yannis Bakos,et al.  Bundling and Competition on the Internet , 1999 .

[18]  G. D. Eppen,et al.  Bundling--new products, new markets, low risk. , 1991, Sloan management review.

[19]  R. Venkatesh,et al.  A Probabilistic Approach to Pricing a Bundle of Products or Services , 1993 .

[20]  M. Sujan,et al.  Consumer Knowledge: Effects on Evaluation Strategies Mediating Consumer Judgments , 1985 .

[21]  Lorin M. Hitt,et al.  Bundling with Customer Self-Selection: A Simple Approach to Bundling Low-Marginal-Cost Goods , 2005, Manag. Sci..

[22]  Richard Schmalensee,et al.  Gaussian Demand and Commodity Bundling , 1984 .

[23]  H. Varian,et al.  Aggregation and Disaggregation of Information Goods: Implications for Bundling, Site Licensing, and Micropayment Systems , 2000 .