Bundling Information Goods to Reduce Search Costs

Abstract

We model the potential for a company bundling high search cost information goods to obtain an advantage over conventional sales. Using the streaming video industry as an example, we find that bundling services can increase a user's utility from films with higher search costs, allowing the service to charge a price premium in a fully served market when the reduction in search costs exceeds the consumer's disutility from a less preferred source. This implies the consumer's benefits are greatest when streaming services focus on products with high search costs. Using theatrical critical review data from film releases as a proxy for demand, the number of reviews as a proxy for search costs, and data from the Netflix streaming library, we find empirical evidence that films with higher search costs are more likely to be included in a streaming bundle.