Optimal Bundling of Technological Products with Network Externality
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.
Volume (Year): 56 (2010)
Issue (Month): 12 (December)
|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.:
- Nicholas Economides, 1997.
"Network Externalities, Complementarities, and Invitations to Enter,"
- Economides, Nicholas, 1996. "Network externalities, complementarities, and invitations to enter," European Journal of Political Economy, Elsevier, vol. 12(2), pages 211-233, September.
- Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
- Carbajo, Jose & de Meza, David & Seidmann, Daniel J, 1990. "A Strategic Motivation for Commodity Bundling," Journal of Industrial Economics, Wiley Blackwell, vol. 38(3), pages 283-98, March.
- Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
- R. Preston McAfee & John McMillan & Michael D. Whinston, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 371-383.
- Choi, Jay Pil, 1994. "Network Externality, Compatibility Choice, and Planned Obsolescence," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 167-82, June.
- Chen, Yongmin, 1997. "Equilibrium Product Bundling," The Journal of Business, University of Chicago Press, vol. 70(1), pages 85-103, January.
- 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.
- Yannis Bakos & Erik Brynjolfsson, 1997.
"Bundling Information Goods: Pricing, Profits and Efficiency,"
Working Paper Series
199, MIT Center for Coordination Science.
- Yannis Bakos & Erik Brynjolfsson, 1999. "Bundling Information Goods: Pricing, Profits, and Efficiency," Management Science, INFORMS, vol. 45(12), pages 1613-1630, December.
- Haruvy, Ernan & Prasad, Ashutosh, 1998. "Optimal product strategies in the presence of network externalities," Information Economics and Policy, Elsevier, vol. 10(4), pages 489-499, December.
- Praveen K. Kopalle & Aradhna Krishna & João L. Assunção, 1999. "The role of market expansion on equilibrium bundling strategies," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(7), pages 365-377.
- Barry Nalebuff, 2004. "Bundling as an Entry Barrier," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 159-187.
- 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.
- 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.
- 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.
- Salinger, Michael A, 1995. "A Graphical Analysis of Bundling," The Journal of Business, University of Chicago Press, vol. 68(1), pages 85-98, January.
- Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," The Journal of Business, University of Chicago Press, vol. 57(1), pages S211-30, January.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:56:y:2010:i:12:p:2224-2236. 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 references are entirely missing, you can add them using this form.