Effects of consumers' context-dependent preferences on product bundling
Qianbo Yin, Baojun Jiang, Sean Xiang Zhou
Production and Operations Management · 2023 · Volume 32 · Issue 6
Abstract
Bundling can change consumers' choice set and affect their purchase decision. It is well documented that consumers' preferences depend on the bundling context. In this paper, we investigate the effects of consumers' context-dependent preferences (CDPs) on the firm's optimal bundling strategy in various competitive situations. We consider a market where a monopolist firm in product categoryAalso sells a product in product categoryB. We analyze three scenarios in categoryB: (1) an independent firm selling a higher quality product, (2) two independent firms selling the higher quality product, and (3) the monopolist in categoryAis also a monopolist in categoryB. We find that CDPs can indeed change the firm's optimal bundling strategy. When the firm has a competitive disadvantage in categoryB, CDPs encourage the firm to offer the bundle (by either pure bundling or mixed bundling). Furthermore, if categoryBmarket is so competitive that the firm possesses negligible market power, mixed bundling can be strictly more effective at increasing the firm's profit than pure bundling because mixed bundling can better take advantage of CDPs. In contrast, if the firm has monopoly power in both categories, CDPs discourage the introduction of the bundle, and pure-component selling is optimal.
Keywords
analytical modeling, bundling, competition, context-dependent preferences
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