Bundling

… a core concept in Economic Analysis and Atlas102

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Concept description

Investopedia (reference below) defines bundling as a marketing strategy that joins products or services together in order to sell them as a single combined unit.

Investopedia goes on to say:

“Bundling allows the convenient purchase of several products and/or services from one company. The products and services are usually related, but they can also consist of dissimilar products which appeal to one group of customers. Not all providers will mention bundling as an option to their customers; therefore, it is important to check whether you can bundle services together. Bundled services will often save consumers money. For example, if you have two insurance policies (home and auto) through two separate companies, you might be able to bundle both policies together using only one company and reduce the total monthly payments. Bundling can also be used to switch several payments into one, making bill payments easier, even if it doesn’t save money.”

Tyler Cowen (reference below) distinguishes price discrimination through tying and from price discrimination through bundling:

  • Tying – one good (called the base good) is tied to a second good (called the variable good). Examples include: printers and cartridges; cell phone and data services; Kindle and Amazon products)
  • Bundling – requiring that products be bought together in a bundle or a package (e.g., Microsoft Office is a bundle of programs; Cable TV is a bundle of stations; a newspaper is a bundle of sections)

The difference is that tied goods are sold one to many (e.g., one printer, many ink cartridges) and bundled goods are sold one to one. In both cases the objective is to have every customer pay their full willingness to pay.

Alex Tabarrok (reference below, video above right) examines several cases of bundling and summarizes as follows.

BudlingWelfare

In reviewing the application of bundling theory to cable TV he notes that the naïve theory that “If I pay $100 for 100 channels, then under a la carte pricing I would pay $1 per channel” is surely wrong.

CableTV

He also discusses why bundling theory suggests that Spotify, which bundles songs through its streaming service, has a more profitable model for distributing music than iTunes, which sells individual songs through micropayments.

Practice questions

At http://www.mruniversity.com/node/301753, accessed 8 May 2016.

  1. Where are you more likely to see businesses “bundling” a lot of goods into one package: In industries with high fixed costs and low marginal costs (like computer games or moviemaking), or in industries with low fixed costs and high marginal costs (like doctor visits, where the doctor’s time is expensive)?

Atlas topic, subject, and course

Monopoly and Price Discrimination (core topic) in Economic Analysis and Atlas102 Economic Analysis.

Source

Investopedia, Bundling, at http://www.investopedia.com/terms/b/bundling.asp, accessed 10 May 2016.

Tyler Cowen, Tying (7-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/tying-economics-example, accessed 8 May 2016.

Alex Tabarrok, Bundling (15-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/bundling-economics-examples, accessed 8 May 2016.

Page created by: Ian Clark, last modified 10 May 2016.

Image: Alex Tabarrok, Minute 0:12 of Bundling (15-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/bundling-economics-examples, accessed 8 May 2016.