In his work, Whinston (1990) showed that it is possible for a monopolist producing one information good facing non-perfect competition in the market for another to extend the firm’s monopoly power from one product’s market to the other by bundling them together (i. e. , “bundling entry-deterrent effect”). That is, by choosing a price that maximizes its profits, an incumbent firm that bundles is selecting a better way to maintain its market share, while making entry unattractive for one-product producers that want to compete with one of the bundled products.
As bundling is gaining acceptance among marketing practitioners, measuring consumers’ response to bundling in a real market setting becomes possible. In this context, bundles typically contain only one unit of each product. This reduces the applicability of the findings to the context of, e. g. , frequently purchased consumer goods. Clearly, the described principles also have implications for firms already marketing product bundles and willing to buy bundle if that opens up new opportunities.
Indeed, companies in industries where bundling is common practice, should watch changes in the environment and verify whether the conditions justifying or even requiring a bundle strategy are still valid. As an industry matures, consumers’ perceived risk of self-composing the bundle decreases and the bundle may lose its extra value, justifying unbundling (Paun, 1993). Also, costs may change over time due to technological innovation.
Till recently, music was typically sold in bundles often or more songs – viz. on CD -as that allowed to exploit scope economies. However, with the advent of the Internet, the marginal cost structure of digitized goods has changed considerably, making it more rewarding to (also) sell individual songs online (Gopal et al. , 2003). This paper leaves some issues of managerial relevance largely unaddressed. First, we pay little attention to the practical aspects of bundling.
Second, this paper does not address the legal issues of bundling. Yet, otherwise viable bundling strategies may turn out unfeasible once legal constraints are accounted for. However, also when pursuing bundling objectives other than reducing or eliminating competition, a marketer should always be aware of the relevant legislation.
Adams, William J. and Janet L. Yellen (1976), “Commodity Bundling and the Burden of Monopoly,” Quarterly Journal of Economics, 90 (August), 475-98.
Bakos, Yannis and Erik Brynjolfsson (1999), “Bundling Information Goods: Pricing, Profits and Efficiency,” Management Science, 45 (12), 1613-30. Bakos, Y. and Brynjolfsson, E. (2000), “Bundling and Competition on the Internet”. Marketing Science 19(1), pp. 63-82. Available at http://www. stern. nvu. edu/~bakos Blumenstein, Rebecca (1999), “Package Plan: AT&T See Wireless as the Key to Its Broader Strategy of Bundling its Services,” in The Wall Street Journal, Sept. 20 (R26).