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

Author

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  • 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)

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.

Suggested Citation

  • Subramanian Balachander & Bikram Ghosh & Axel Stock, 2010. "Why Bundle Discounts Can Be a Profitable Alternative to Competing on Price Promotions," Marketing Science, INFORMS, vol. 29(4), pages 624-638, 07-08.
    • Handle: RePEc:inm:ormksc:v:29:y:2010:i:4:p:624-638
    DOI: 10.1287/mksc.1090.0540
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    References listed on IDEAS

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    2. Zhou, Shu & Song, Boqian & Gavirneni, Srinagesh, 2020. "Bundling decisions in a two-product duopoly – Lead or follow?," European Journal of Operational Research, Elsevier, vol. 284(3), pages 980-989.
    3. Niu, Baozhuang & Yu, Xinhu & Li, Qiyang & Wang, Yulan, 2023. "Gains and Losses of Key Opinion Leaders’ Product Promotion in Livestream E-commerce," Omega, Elsevier, vol. 117(C).
    4. Cao, Qingning & Geng, Xianjun & Zhang, Jun, 2015. "Strategic Role of Retailer Bundling in a Distribution Channel," Journal of Retailing, Elsevier, vol. 91(1), pages 50-67.
    5. Upender Subramanian & Jagmohan S. Raju & Z. John Zhang, 2013. "Exclusive Handset Arrangements in the Wireless Industry: A Competitive Analysis," Marketing Science, INFORMS, vol. 32(2), pages 246-270, March.
    6. 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.
    7. Song Lin, 2017. "Add-on Policies Under Vertical Differentiation: Why Do Luxury Hotels Charge for Internet While Economy Hotels Do Not?," Marketing Science, INFORMS, vol. 36(4), pages 610-625, July.
    8. Maxim Sinitsyn, 2012. "Coordination of Price Promotions in Complementary Categories," Management Science, INFORMS, vol. 58(11), pages 2076-2094, November.
    9. Vithala R. Rao & Gary J. Russell & Hemant Bhargava & Alan Cooke & Tim Derdenger & Hwang Kim & Nanda Kumar & Irwin Levin & Yu Ma & Nitin Mehta & John Pracejus & R. Venkatesh, 2018. "Emerging Trends in Product Bundling: Investigating Consumer Choice and Firm Behavior," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 5(1), pages 107-120, March.
    10. Zheng, Zhijun & Li, Gang & Cheng, T.C.E & Wu, Feng, 2022. "Offline supplementary service strategies for the online marketplace: Third-party service or marketplace service?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 164(C).
    11. Steven M. Shugan & Jihwan Moon & JQiaoni Shi & Nanda S. Kumar, 2017. "Product Line Bundling: Why Airlines Bundle High-End While Hotels Bundle Low-End," Marketing Science, INFORMS, vol. 36(1), pages 124-139, January.
    12. Kocas, Cenk & Pauwels, Koen & Bohlmann, Jonathan D., 2018. "Pricing Best Sellers and Traffic Generators: The Role of Asymmetric Cross-selling," Journal of Interactive Marketing, Elsevier, vol. 41(C), pages 28-43.
    13. Meyer, Jeffrey & Shankar, Venkatesh, 2016. "Pricing Strategies for Hybrid Bundles: Analytical Model and Insights," Journal of Retailing, Elsevier, vol. 92(2), pages 133-146.
    14. Ganesh Iyer & Dmitri Kuksov, 2012. "Competition in Consumer Shopping Experience," Marketing Science, INFORMS, vol. 31(6), pages 913-933, November.

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