The Dynamic Effects of Bundling as a Product Strategy

Several key questions in bundling have not been empirically examined: Do consumers value bundles over and beyond their component products, indicating synergy? Is mixed bundling more effective than pure bundling or pure components? Does correlation in consumer valuations make bundling more or less effective? Does bundling serve as a complement or substitute to network effects? To address these questions, we develop a consumer-choice model from micro-foundations to capture the essentials of our setting, the handheld video game market. We provide a framework to understand the dynamic, long-term impacts of bundling on demand. We find evidence that bundles have a significant negative synergy effect, and that consumer valuations for component products are positively correlated. Despite these effects, bundling can be effective through a third previously unexamined effect: dynamic consumer segmentation. Our results therefore contradict prior static models: bundling can be profitable even when consumer valuations for components are highly correlated. In the absence of bundling, both hardware and software sales decrease, and consumers who had previously purchased bundles might delay purchases, resulting in lower revenues. We also find that mixed bundling dominates pure bundling and pure components in terms of both hardware and software revenues.