Managing Customer Search via Bundling

Abstract

Bundling has been a pervasive marketing strategy and its success has been largely attributed to its strength in reducing customer valuation dispersion. Less is known about the efficacy of bundling in settings where customers are less sure about their valuations for a product, especially when that product is newly launched or has an experience nature, and can conduct a costly search to learn the product content and discover their true valuations. In this paper, we investigate the interplay between bundling and searching, and its implications for a monopolist’s pricing strategy. We apply a novel framework of multi-product demands and non-obligatory search where customers desiring multiple products reserve the right to purchase these products without having to search them first and study two different markets: 1) a market of one mature and one new product in which valuation uncertainty exists for the new product only; 2) and a market of two new products in which valuation uncertainty exists for both products. The firm fully anticipates the customers’ search behaviors, determines whether to bundle the products or unbundle them, and optimally chooses the prices accordingly. We show that bundling cultivates search in a market of one mature and one new product, but inhibits search in a market of two new products. This contrast emerges as a result of market structures: bundling reduces the appeal of search by making it sequential and path dependent in the latter market, but is less effective in doing so due to the existing heterogeneity in the former market. Our results thus point to an intricate interaction between search, market heterogeneity and prices, and their joint impact on the optimal pricing strategy. We also show that the impact of marginal cost on the optimal pricing strategy can be significantly different than that in the absence of uncertainty when customer search is trivially ruled out. We also study a market of two new but asymmetric products and show that customers’ optimal search sequence under bundling is such that the superior product is always searched first. Unlike the case of symmetric products wherein bundling always (weakly) dominates separate selling, the presence of a strong product asymmetry can overturn the dominance of bundling. Our analysis provides managers with guidelines on selling multiple experience or new products when customers search. Our work adds to the academic literature on search by analyzing multi-product demands and multi-product search, and proposing bundling as a lever to manage customer search for better revenue and profits.