The relation between the knowledge of reservation prices and the degree of success of bundling strategies

International Journal of Business Strategy, Jan, 2008 by Jose G. Aguilar-Barcelo, Marco A. Pinto-Ramos, Natanael Ramirez-Angulo

Data reveal that there is an absence of correlation between the Lerner index and the percentage of advertising occupied by bundles within the total; therefore, it does not seem that those firms that make a larger promotion of their bundles are in a better competitive position. Nevertheless, there is a positive correlation of .29 and significant at 2% between the latter variable and the proportion of the price of the product individually more expensive included in the bundle with respect to its price; this indicates that when there are important asymmetries in the individual reservations prices for the products comprising the bundle, the firms do identify it as a strength. Finally, there is a slight correlation of -.24 though significant at 5% between the Lerner index and the ratio between the price of the most expensive product contained in the bundle and its price; therefore, the price asymmetries are being used to make the bundles more attractive with respect to individual products.

6. CONCLUSION

With the support of an economic model of a monopolist that maximize benefits selling two goods, in this paper, we exam the impact that might have the relationship of the reservation prices of consumers about the goods offered individually and in a bundle, in the offer decisions of the firm and in determining its prices and profits. We also analyses the impact of asymmetries in the mean values and in the variances of these reservation prices and the costs of the products.

It is concluded that prices set by the firms and consequently their sales and profits are highly sensible to the internalization of the information they have about the reservation prices of their consumers and, as a result, also will be the conformation of its commercial strategy in terms of how it offer their products. The mixed bundling strategy enable to the firm to fix set higher prices for their individual products and for the bundling. Although it is also possible that for certain scenarios, the firm would has an interest in setting a low price of its bundle.

It seems that the foregoing happens because with this type of product, a demand with lower added dispersion of the reservation prices can be achieved and therefore there would be a more sensible one to price reductions. The empirical evidence corroborates the previous assertion and even shows more sensitivity of the markup of the firms of what the competence and efficiency levels may represent. The knowledge about the existence of a negative correlation between the consumers' reservation prices for the products allows the increase of sales by taking advantage of a larger elasticity of a more homogeneous demand and could probably take over a larger consumer surplus. Therefore, it constitutes by itself a trigger of the appearance of bundling in any of its forms, irrespectively of the fact that there might be other reasons of efficiency or competitive strategy to that purpose. The empirical evidence shows that 75% of the establishments use some type of bundling strategy.