Bundling new products with old to signal quality, with application to the sequencing of new products

Abstract

This paper provides a new rationale for bundling based on informational leverage. Bundling a product of established quality to one of unknown quality can mitigate the problem of asymmetric information encountered in the latter market. Leveraging reputation in one market into another has implications for the timing of new product introductions. Bundling motivated by informational leverage enhances efficiency by increasing consumer’s access to costly information. When the possibility of endogenous timing of product introduction is considered, however, the welfare consequences of bundling are ambiguous. The positive effect of market creation must be weighed against the negative effect of market delay.