Theories for Product Bundling

Theories for yield BundlingRASHIDA ABDULHAMIDWHY DO FIRM BUNDLE TWO PRODUCTS TOGETHER AND HOW IS IT LIKELY FOR THEM TO MAKE PROFIT?What is mathematical convergence take?Product pack is s indicate doer combining ii or more beloveds together and selling them as on wholeness combined product. It is mostly vulgar in market with imperfect competitive product. It is a marketing strategy that joins products or services together in order to sell them as a single combined unit. Bundling allows customers to purchase deuce or several product at the convenient purchasing power from wiz company. The products and services argon usually related, but they evoke also consist of dissimilar products which appeal to one group of customers. It based on consumers value the grouped packet boat more than the individual items.Why do producer go into product constrict?Producers go into product bundling because of so many reasons, bundling of two products gives the producer to pop the question m ore affordable determines for their customer with also a better interest for them. Bundling enhances an organizations offering mix dapple at the comparable time minimizing cost of both(prenominal) production and selling. This is curl upive to consumers who will benefit from a single, value-oriented purchase of complementary offerings. Bundling is withdrawive to producers by increasing efficiencies, such reducing marketing and distribution costs. It domiciliate also encourage customers to look to one single source to offer several solutions.Product bundling may also incorporate products from multi producers. Example of this is the palo alto softw are may include one of their business planning product with an accounting software package, or come in in a small business backpack through a major computer manufacturer whose customers would have the opportunity to purchase with their new PC. In these situations, bundles may cost effectively open to new marketing channels.FACTOR S CONSIDER WHEN BUNDLING INCLUDEVOLUME bundling typically increases unit sales volume.MARGING bundling can reduce margins.EXPPOSURE bundling may offer new channel opportunities or exposure to new potential customers.RISK if executed incorrectly, bundling may cannibalize more profitable sale, resulting in lower contribution margins and potential channel conflict.This last example has three important implications.First, the market outcome is non necessarily efficient, in the sense that a social planner with full information and no costs of imposing a solution could do better. That should non be surprising in light of the results in the product selection belles-lettres that the set of product offerings is not necessarily efficient.Second, season the model reveals a bias toward the offering of a bundle, the bias is primarily toward flux bundling, not toward tenuous bundling or other forms of tying. Indeed, although the preceding example does not carry it, the model can be interpr eted to suggest a bias against pure bundling. In a companion paper, we show that the conditions for pure bundling to be the lone virtually(prenominal) sustainable outcome are stronger than the conditions for pure bundling to be the efficient outcome. The model does not rule out the possibility of inefficient tying. fasten can be. the predicted outcome when components selling is optimal, but there is no systematic reason for this to be the case. There is a tendency in the model for c hagglinging groups to get the offering they necessitate. But this effect holds equally when the biggest group wants just one component as when the biggest group wants the bundle.Third, in analyzing the welfare consequences of bundling discounts ( infra mixed bundling), it is important to distinguish between marginal cost savings and the effect of set costs. Both are potential sources of savings to the group that purchases the bundle, but only the marginal cost savings reflect welfare gains. In this e xample, there is a substantial bundle discount the bundle harm of 19 is 5 less than the sum of the components hurts. Under pure components selling, they would pay a total of 20, which is also more than the bundle price on a lower floor mixed bundling. Notwithstanding this head-to-head benefit, it is inefficient for the bundle to be offered. In contrast, if there were no fixed costs and the bundle discount reflected a marginal cost savings of 5, hence mixed bundling would be efficient..Which products are offered depends on the extent to which bundling lowers marginal cost, on the fixed costs of offering from each one product, and on learn. For a product to be offered in the kind of contestable market we describe here, three conditions must holdthese are known in the formal economics literature as sustainability conditions.First, no price can exceed average cost. Otherwise another firm could enter and provide the product to the same group of customers for less.Second, the price of each product must be low equal that the seller of a second existing product cannot profitably lower its price and attract the purchasers of the first.Third, prices must be low enough that entry with a product not offered is unprofitable.First, marginal cost savings are neither necessary nor fitted for tying to occur in competitive markets. They are not necessary because, even without marginal cost savings, firms may not identifyly provide a product if there is not enough demand to cover the fixed cost of offering that product this result assumes that the firm is offering a bundle that attracts at least some consumers who want that product. They are not sufficient because, even with marginal cost savings, firms may find that there are enough consumers who want the products fractionly and do not value the other product they will therefore oiler the bundle to attract consumers who want both and separate products to attract consumers who only want one.Second, fixed costs are a n ecessary but not sufficient condition for tying to occur in competitive markets. Firms eliminate a product choice that some consumers want because it enables them to avoid the fixed costs of offering it separately. Or, to put it another way, firms cannot provide some products separately because there is not enough demand to cover the costs.Third, pure bundling can arise for two reasons which are worth distinguishing (1) moderate fixed costs when many consumers demand all components and demand is low for at least one of the individual components and (2) high fixed costs. Without fixed costs, our assumptions generally imply mixed bundling. Under mixed bundling, the bundle is available for those who want both goods and the separate products are available for those who want just one. With some fixed costs, however, pure bundling can result if many customers want both goods and demand for the component does not justify the fixed cost of offering them separately. Pure bundling can also oc cur, however, even if no consumer wants both components. These will happen when fixed costs are very high, which in turn implies that pure bundling saves significant fixed costs over components selling.Fourth, firms may sell some but not all of the components separately from the bundle. This occurs when demand for the bundle and one of the separate components is substantial but demand for the other is not.In a separate welfare analysis we show that firms may not offer the optimal product variety (the standard result in the product variety literature) but that the tendency is to offer too much mixed bundling rather than to offer too much tying. Table 3 contains our first example. The size of each group of consumers is 100. The marginal costs of both goods and 2 are 8 while the marginal cost of the bundle is 14. Since the latter is less than the sum of the components prices, there are marginal cost savings from bundling. Fixed costs are 600 It follows that the prices of the component s under mixed bundling are 14 while the price of the bundle is 20. As the next line in the Table indicates, the price of the bundle under pure bundling is 16. It is lower than the price of the bundle under mixed bundling because more customers share the fixed cost. Under components selling, the prices of the components are 11 each. As with pure bundling, the prices are lower than under mixed bundling because the fixed costs are shared with a vauntinglyr group.Before turning to wherefore mixed bundling is sustainable, let us consider why the other product configurations are not. Under pure bundling, the price of the bundle is 16. This price is suasible to entry by, say, a producer of good 1 at a price of 14. This component price is less than the 16 that group 1 pays for the bundle under mixed bundling, and it is sufficient to cover costs even if only group 1 buys the bundle. A pure component selling, in which the price of each of the two goods is 11, is not sustainable either. Gro up B pays a total of 22 for the two components, so entry with the bundle at a price of 20 attracts group B and is profitable. When the bundle and just good 1 are offered, the price of the bundle is 17. Entry by a supplier of good 2 at a price of 11 is then profitable. For the same reason, it is not sustainable to offer just the bundle and good 2.Having seen how entry can prevent a set of offerings from being sustainable, we can now understand why mixed bundling is sustainable in this case. All possible products are offered in mixed bundling, so it is not possible to enter with a new product. We do, however, need to consider whether cutting the price of an existing product (or products) to attract an additional block of customers would be profitable. At these prices, it is not. For example, to sell the bundle at a price that is low enough to attract groups 1 and 2 one would still have to charge 16. But that would not be low enough to attract groups 1 and 2, which can purchase only th e good they want under mixed bundling for 14. Similarly, cutting the price of the components to attract group B would not be profitable. If group B purchased the components, the prices would still have to be 11. Group B would then pay 22 for both goods, which is more than the 20 it pays for the bundle under mixed bundling.There are a consider of factors that give rise to mixed bundling in this example. First, there are marginal cost savings from bundling. At the same time, the marginal cost of the bundle exceeds the marginal cost of just one of the components. So, putting fixed costs aside, there would be an advantage to having the separate components available to those who want just one of them. Also, the demand for each of the three possible products is substantial and, while fixed costs are present, they are not so great as to keep offering one of the goods.The results in Table 3 depend, of course, on the assumed values for each of the seven uncertains in the model. Small chan ges in each variable would affect prices, but mixed bundling would still be the qualitative outcome. With larger changes, however, the qualitative outcome would change as well. Since mixed bundling means that all three of the possible products are offered, any change would eliminate one or more of the products offered.For example, consider a diminution in the snatch of people who want just good 1. The fixed cost of offering good 1 would then have to be spread over a smaller customer base so the price of good 1 would have to increase. When the number of people who want only good 1 is sufficiently small, the price of good 1 would exceed the price of the bundle. Consumers who want just good 1 would then buy the bundle (anSd discard good 2). dangerous 1 would disappear from the market, leaving good 2 and the bundle as the only products offered. In that case, good 2 is tied to good 1.Just as a reduction in the number of people who want good 1 causes the price of good 1 to go up, an in crease in X1 causes the price to drop. With a sufficiently large increase in the demand for good 1 alone, the price can drop enough that people who want both goods find it cheaper to buy them separately. The bundle disappears from the market. The result is pure components selling, which does not entail tying.Table 4 shows the change in product offerings that could result from sufficiently large increases and decreases of each of the seven variables in the model. (As we note, in some cases, even a large change will not alter the product offerings.) The first row of the table reports the results described above. The left half of that row says that with a sufficiently large decrease in X1, the set of products offered becomes the bundle and good 2 while good 1 is no longer offered. The right hand half of the first row shows that with a sufficiently large increase in the demand for good 1, the set of products offered are goods 1 and 2 while the bundle is no longer offered.As Table 4 indi cates, there are two cases in which mixed bundling are the qualitative outcome no matter how much the variable change (in the given direction). One of these is a reduction in fixed costs. That result makes intuitive sense. Fixed costs in the model can cause a potential product not to be offered. Given the other assumed values in Table 4, fixed costs of 600 are low enough that all three of the possible products can be offered profitably. A reduction in the fixed cost of a product offering would only reinforce the possibility of providing for each group the product tailored to its particular demand.