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Why Bundle Discounts Can Be a Profitable Alternative to Competing on Price Promotions

Author Info

  • Subramanian Balachander

    ()

    (Krannert School of Management, Purdue University, West Lafayette, Indiana 47906)

  • Bikram Ghosh

    ()

    (Moore School of Business, University of South Carolina, Columbia, South Carolina 29208)

  • Axel Stock

    ()

    (College of Business Administration, University of Central Florida, Orlando, Florida 32816)

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    Abstract

    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.

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    File URL: http://dx.doi.org/10.1287/mksc.1090.0540
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    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 29 (2010)
    Issue (Month): 4 (07-08)
    Pages: 624-638

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    Handle: RePEc:inm:ormksc:v:29:y:2010:i:4:p:624-638
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    Keywords: bundling; competitive marketing strategy; game theory; price promotions; brand loyalty;

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    1. Chen, Yongmin, 1997. "Equilibrium Product Bundling," The Journal of Business, University of Chicago Press, vol. 70(1), pages 85-103, January.
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    7. 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.
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    Cited by:

    1. Csilla Horváth & Dennis Fok, 2013. "Moderating Factors of Immediate, Gross, and Net Cross-Brand Effects of Price Promotions," Marketing Science, INFORMS, vol. 32(1), pages 127-152, July.
    2. Ganesh Iyer & Dmitri Kuksov, 2012. "Competition in Consumer Shopping Experience," Marketing Science, INFORMS, vol. 31(6), pages 913-933, November.
    3. Maxim Sinitsyn, 2012. "Coordination of Price Promotions in Complementary Categories," Management Science, INFORMS, vol. 58(11), pages 2076-2094, November.

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