Bundling

							Welcome

   Customer Centric Systems
          Bundling

       Jonathan D. Wareham
        wareham@acm.org
What would you pay for all this stuff?
Desired Revenue



      3.5         3.5

      3.5   3.5         3.5
                              = 35
      3.5   3.5     3.5


      3.5               3.5
Your Valuation



   3       3

   4   6           3
                       = 35
   2   3       4


   4           3
                       But If Price = 3.5
                       Revenue = 14
Solution: Bundle it!!!



     3              3

      4        6            3
                                        = 35
      2        3        4


      4                 3
                                        Revenue = 35

 Someway, somehow, you will find a combination of products equal to 35
Why Bundle?
 Technological complementarities in
  production, distribution, and
  consumption
 Sunday newspaper
   A bundle of articles – we do not read
    them all, but which ones??
   Economies of scale in production and
    distribution
Why Bundle?
 Price discrimination
   Intuition different
   Price discrimination based on ability to
    identify and segregate customers
   But we can’t always do that – hence 2nd
    degree price discrimination
   But when marginal costs are low –
    bundling may be better!
Bundling
 Price discrimination
   Increases the menu of prices to better
    match heterogeneous distribution of
    consumers
   Bundling reduces the effective
    heterogeneity of consumers’ willingness
    to pay.
   Someway, somehow – out of these 10
    goods, you will find some combination
    that you will value at 20$ - we just do
    not know which ones.
Key Variables
 Production Costs: cost of producing
  additional units for the bundle
 Distribution Costs: Costs of
  distributing a bundle
 Transaction Costs: Costs of
  administrating the transaction –
  arranging for payment
 Binding Costs: cost of binding
  components together as a bundle
 Menu Costs: Costs of administering
  multiple prices of bundle
Production Costs
When production costs – specifically
   marginal costs are low – bundle.
The inclusion of an additional product
   does not cost much, so why not do it
   anyway and increase your chances of
   addressing consumers valuation
   profile.
   Software, magazines, cable packages
Hi marginal costs: un-bundle
Distribution Costs
When distribution costs are high -
 bundle.
  Newspapers
Low distribution costs: un-bundle
  Pay per view TV
  Buying single articles on internet
Transaction Costs
If cost of administering small payments
   is sufficiently low – use micro-
   payments
  Pay per view
  Buying single articles on internet


If cost of administering payments is
   high-
   use long term payment/subscriptions
   Magazines, Cable TV
Binding and Menu Costs
 If binding costs are high – don’t
  bundle
 High menu costs may make
  discriminatory pricing difficult and
  may favor bundling by default –

Neither of these are as determinative as
  the others.
To Bundle or to Un-Bundle?
 It depends on a combination of all
  factors
 Marginal cost most important
 Distribution costs secondary
 Transaction costs: are micro
  payments feasible?
 Binding and Menu costs peripheral
  but an issue.