On the Profitability of Bundling Sale Strategy for Online Service Markets With Network Effects

Abstract

In recent years, we have witnessed a growing trend for online service companies to offer “bundling sales” to increase revenue. Bundling sale means that a company groups a set of products/services and charges this bundle at a fixed price, which is usually less than the total price of individual items in the bundle. In this work, our aim is to understand the underlying dynamics of bundling, particularly what is the optimal bundling sale strategy and under what situations it will be more attractive than the separate sales. We focus on online service markets that exhibit network effects . We formulate mathematical models to capture the interactions between buyers and sellers, analyze the market equilibrium and its stability, and provide an optimization framework to determine the optimal sale strategy for a service provider. We analyze the impact of various factors on the profitability of bundling, including the network effects, operating costs, and variance and correlation of customers’ valuations toward these services. We show that bundling is more profitable when the variance of customers’ valuations and the operational cost of the services are small. In addition, a positive network effect and a negative correlation among customers’ valuation on services increase the profitability of bundling, whereas the heterogeneity of services and the asymmetry of operating costs reduce its advantage.