Why Bundle Discounts Can Be a Profitable Alternative to Competing on Price Promotions
Price promotions and bundling have been two of the most widely used marketing tools in industry practice. Past literature has assumed that firms respond to price promotions by promoting a product in the same category. In this paper, we extend this literature as well as the bundling literature by considering the possibility that a firm may respond to a competitor's price promotions by also offering a cross-buying or bundling discount. Using a game-theoretic model, we show that bundle discounts can help increase profits in a competitive market by creating endogenous loyalty, thereby reducing the intensity of promotional competition. We also find that bundle discounts can be used as an effective defensive marketing tool to prevent customer defection to the competition.
Volume (Year): 29 (2010)
Issue (Month): 4 (07-08)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
- Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," The Journal of Business, University of Chicago Press, vol. 57(1), pages 211-230, January.
- Joel Sobel, 1984. "The Timing of Sales," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 353-368.
- Jagmohan S. Raju & V. Srinivasan & Rajiv Lal, 1990. "The Effects of Brand Loyalty on Competitive Price Promotional Strategies," Management Science, INFORMS, vol. 36(3), pages 276-304, March.
- Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-449, October.
- Bikram Ghosh & Subramanian Balachander, 2007. "Research Note--Competitive Bundling and Counterbundling with Generalist and Specialist Firms," Management Science, INFORMS, vol. 53(1), pages 159-168, January.
- Richard A. Colombo & Donald G. Morrison, 1989. "Note—A Brand Switching Model with Implications for Marketing Strategies," Marketing Science, INFORMS, vol. 8(1), pages 89-99.
- Chakravarthi Narasimhan, 1984. "A Price Discrimination Theory of Coupons," Marketing Science, INFORMS, vol. 3(2), pages 128-147.
- Chen, Yongmin, 1997. "Equilibrium Product Bundling," The Journal of Business, University of Chicago Press, vol. 70(1), pages 85-103, January.
- Pradeep Chintagunta & Tülin Erdem & Peter E. Rossi & Michel Wedel, 2006. "Structural Modeling in Marketing: Review and Assessment," Marketing Science, INFORMS, vol. 25(6), pages 604-616, 11-12.
- R. Venkatesh & Wagner Kamakura, 2003. "Optimal Bundling and Pricing under a Monopoly: Contrasting Complements and Substitutes from Independently Valued Products," The Journal of Business, University of Chicago Press, vol. 76(2), pages 211-232, April.
- Matutes, Carmen & Regibeau, Pierre, 1992. "Compatibility and Bundling of Complementary Goods in a Duopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 37-54, March.
- Karsten Hansen & Vishal Singh & Pradeep Chintagunta, 2006. "Understanding Store-Brand Purchase Behavior Across Categories," Marketing Science, INFORMS, vol. 25(1), pages 75-90, 01-02.
- Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April.
- Paul Klemperer, 1987. "The Competitiveness of Markets with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 138-150, Spring.
- Sanjay K. Dhar & Jagmohan S. Raju, 1998. "The Effects of Cross-Ruff Coupons on Sales and Profits," Management Science, INFORMS, vol. 44(11-Part-1), pages 1501-1516, November.
- William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 90(3), pages 475-498.
When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:29:y:2010:i:4:p:624-638. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.