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Customers often search for information on products before making their purchase decisions. With the emergence of online review platforms, this has become quicker and easier than ever, such that companies must manage customer search to attract and retain customers. How might the common marketing strategy of bundling—where multiple goods or services are sold together—be leveraged for this purpose? This is the focus of Chenguang (Allen) Wu and Ying-Ju Chen of HKUST and a colleague, whose novel framework offers insights into profitability and customer welfare for firms selling multiple experience or new products.

Although product bundling is “a pervasive marketing strategy in various industries,” say the researchers, it has received little attention in studies to date. Seeking to advance knowledge of bundling and customer search, the authors focused on “settings where customers desire multiple products and actively search these products to resolve uncertainty.” They developed a novel game-theoretic framework that exposes the fundamental interplay between product bundling and customer search under multiproduct demands.

Specifically, the researchers modeled a monopoly firm selling two products under two different market structures: a market comprising one newly launched and one mature product, and a market comprising two new products. The mature product is not associated with uncertainty and customers do not search for this product. In contrast, customers are unsure how to value the new products and may choose to carry out a search, incurring some level of search cost. The firm anticipates customers’ search behaviors, decides whether to employ a bundling or separate selling strategy, and chooses the optimal prices for profitability.

Applying their novel framework to the above scenarios, the researchers found that, first, market structure was a critical factor determining how bundling affects customer search and how search in turns affects bundling profitability. Notably, in the market of one new product and one mature product, bundling encouraged search and outperformed separate selling when the search cost was low. In contrast, in the market comprising two new products, bundling inhibited search and outperformed separate selling regardless of the search cost.

In an extension of their base model, the researchers also found that mixed bundling, where products are offered alongside the bundle, “significantly outperform[ed] pure bundling and separate selling in a market of one mature and one new product under a moderate search cost.”

“Our results shed light on the practice of bundling new products with mature ones under small search costs,” say the researchers. For instance, the findings explain the profitability of compilation music albums, where newly released songs are bundled with old ones, and whose sellers often offer previews that effectively lower search costs. The results may also offer insights into the profitability and customer welfare implications of product bundling for different types of sightseeing attractions, including the Statue of Liberty in the U.S.

The “intricate interplay between bundling, prices, and search” revealed by the researchers is sure to offer guidance in many other contexts. “Our effort is of practical significance to a number of realistic settings,” conclude the researchers.