Welcome Customer Centric Systems Bundling Jonathan D. Wareham

What would you pay for all this stuff?

Desired Revenue 3.5 = 35

Your Valuation = 35 But If Price = 3.5 Revenue = 14

Solution: Bundle it!!! = 35 Revenue = 35 Someway, somehow, you will find a combination of products equal to

Why Bundle?  Technological complementarities in production, distribution, and consumption  Sunday newspaper A bundle of articles – we do not read them all, but which ones?? Economies of scale in production and distribution

Why Bundle?  Price discrimination Intuition different Price discrimination based on ability to identify and segregate customers But we can’t always do that – hence 2 nd degree price discrimination But when marginal costs are low – bundling may be better!

Bundling  Price discrimination Increases the menu of prices to better match heterogeneous distribution of consumers Bundling reduces the effective heterogeneity of consumers’ willingness to pay. Someway, somehow – out of these 10 goods, you will find some combination that you will value at 20$ - we just do not know which ones.

Key Variables  Production Costs: cost of producing additional units for the bundle  Distribution Costs: Costs of distributing a bundle  Transaction Costs: Costs of administrating the transaction – arranging for payment  Binding Costs: cost of binding components together as a bundle  Menu Costs: Costs of administering multiple prices of bundle

Production Costs When production costs – specifically marginal costs are low – bundle. The inclusion of an additional product does not cost much, so why not do it anyway and increase your chances of addressing consumers valuation profile. Software, magazines, cable packages Hi marginal costs: un-bundle

Distribution Costs When distribution costs are high - bundle. Newspapers Low distribution costs: un-bundle Pay per view TV Buying single articles on internet

Transaction Costs If cost of administering small payments is sufficiently low – use micro- payments Pay per view Buying single articles on internet If cost of administering payments is high- use long term payment/subscriptions Magazines, Cable TV

Binding and Menu Costs  If binding costs are high – don’t bundle  High menu costs may make discriminatory pricing difficult and may favor bundling by default – Neither of these are as determinative as the others.

To Bundle or to Un-Bundle?  It depends on a combination of all factors  Marginal cost most important  Distribution costs secondary  Transaction costs: are micro payments feasible?  Binding and Menu costs peripheral but an issue.