Optimal Bundling of Technological Products with Network Externality

Authors:
Ashutosh Prasad;R. Venkatesh;Vijay Mahajan
Affiliations:
School of Management, The University of Texas at Dallas, Richardson, Texas 75080;Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, Pennsylvania 15260;McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712
Venue:
Management Science
Year:
2010

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Abstract

For many high-tech and Internet-related products, utility to consumers depends in part on the size of the user base, a phenomenon called network externality. A firm with a portfolio of these and other products---that are often asymmetric in their degree of network externality or marginal cost---may have to look beyond the traditional strategies of pure components, pure bundling, and mixed bundling. One such strategic alternative in a two-product case would be a so-called mixed bundling-1 under which the bundle and product 1 are offered, but the other product can only be purchased in a bundled form. The purpose of this study is to compare and contrast the impact of such asymmetry or symmetry in (direct) network externality and cost on the choice of bundling strategies. We model a monopolist firm that has a product in each of two categories and faces heterogeneous consumers. Results suggest that pure bundling is more profitable when both products have low marginal costs or high network externality whereas pure components or mixed bundling-1 is more profitable when the products diverge in their costs and network externality (e.g., only one product has network externality). Traditional mixed bundling is optimal in other instances.