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Mixed Bundling in Retail DVD Sales: Facts and Theories

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  • Luis Cabral
  • Gabriel Natividad

Abstract

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.
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Suggested Citation

  • Luis Cabral & Gabriel Natividad, 2018. "Mixed Bundling in Retail DVD Sales: Facts and Theories," Working Papers 18-15, New York University, Leonard N. Stern School of Business, Department of Economics.
  • Handle: RePEc:ste:nystbu:18-15
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    File URL: http://luiscabral.net/economics/workingpapers/retailDVDJul2018.pdf
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    References listed on IDEAS

    as
    1. Katherine Ho & Justin Ho & Julie Holland Mortimer, 2012. "The Use of Full-Line Forcing Contracts in the Video Rental Industry," American Economic Review, American Economic Association, vol. 102(2), pages 686-719, April.
    2. Matthew Gentzkow, 2007. "Valuing New Goods in a Model with Complementarity: Online Newspapers," American Economic Review, American Economic Association, vol. 97(3), pages 713-744, June.
    3. Luís Cabral & Gabriel Natividad, 2016. "Cross-selling in the US home video industry," RAND Journal of Economics, RAND Corporation, vol. 47(1), pages 29-47, February.
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    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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