Mixed Bundling in Retail DVD Sales: Facts and Theories

Many DVD titles are sold in retail stores in bundles, typically a bundle of two different titles with common characteristics: same lead actor/actress, same director, same genre, etc. This suggests that consumer valuations are positively correlated across the bundle components, which in turn runs counter to the received wisdom that bundling is most profitable when valuations are negatively correlated. In this paper, we propose a solution to this puzzle, one that is based on the observation that DVDs are sequentially released durable goods. At the time the second title is released, it is likely that high-valuation buyers will have bought the first one. For this reason, even though ex-ante valuations are positively correlated, ex-post -- that is, at the time the second title is released -- valuations are negatively correlated. We provide sufficient conditions such that mixed bundling increases revenues and the revenue increase is greater the more positively correlated valuations are. We also provide empirical confirmation of this prediction as well as an independent estimate from a calibrated analytical model.