The Dynamic Effects of Bundling as a Product Strategy

Several key questions in bundling have not been empirically examined: Is mixed bundling more effective than pure bundling or pure components? Does correlation in consumer valuations make bundling more or less effective? Does bundling serve as a complement or substitute to network effects? To address these questions, we develop a consumer-choice model from micro-foundations to capture the essentials of our setting, the handheld video game market. We provide a framework to understand the dynamic, long-term impacts of bundling on demand. The primary explanation for the profitability of bundling relies on homogenization of consumer valuations for the bundle, allowing the firm to extract more surplus. We find bundling can be effective through a novel and previously unexamined mechanism of dynamic consumer segmentation, which operates independent of the homogenization effect, and can in fact be stronger when the homogenization effect is weaker. We also find that bundles are treated as separate products (distinct from component products) by consumers. Sales of both hardware and software components decrease in the absence of bundling, and consumers who had previously purchased bundles might delay purchases, resulting in lower revenues. We also find that mixed bundling dominates pure bundling and pure components in terms of both hardware and software revenues. Investigating the link between bundling and indirect network effects, we find that they act as substitute strategies, with a lower relative effectiveness for bundling when network effects are stronger

Technological Tying and the Intensity of Competition: An Empirical Analysis of the Video Game Industry

Using data from the 128 bit video game industry this paper evaluates the incentives for hardware firms to technologically tie their produced software to their own hardware as well as analyze the impact such an action has on the intensity of console price competition. Tying occurs when a console hardware manufacturer produces software which is incompatible with rival hardware. There are two important trade-offs an integrated firm faces when implementing a technological tie. The first is an effect that increases console market power and forces prices higher. The second, an effect due to the integration of the firm, drives prices lower. A counterfactual exercise determines technological tying of hardware and software increases console price competition and is due to console makers subsidizing consumer hardware purchases in order to increase video games sales, in particular their tied games, where the greatest proportion of industry profits are made. Moreover, I determine technological tying to be a dominant strategy for hardware manufacturers when software development costs are low.</p

"Vertical" Integration and Foreclosure of Complementary Products

Using data from the 128 bit video game industry this paper evaluates the effect of vertical integration and the foreclosure of complementary software to rival hardware. Foreclosure occurs when a console hardware manufacturer produces software which is incompatible with rival hardware. Estimation of video game console demand deviates from previous research by incorporating video game heterogeneity and software competition into demand for consoles-consumers differentiate between games rather than assume video games are homogeneous. There are two important trade-offs to vertical integration. The fi…rst is a foreclosure effect which increases console market power and forces prices higher. The second, an efficiency effect, drives prices lower. Counterfactual exercises determine vertical integration with foreclosure is pro-competitive. It increases price competition as well as consumer welfare and console manufacturer pro…ts, and is due to console makers subsidizing consumers in order to increase video games sales, in particular their own developed games, where the greatest proportion of industry pro…ts are made

Mixed Bundling in Two-Sided Markets: Theory and Evidence

Abstract We analyze mixed bundling in two-sided markets and …nd that the pricing structure deviates from traditional bundling as well as the standard two-sided markets literature--we determine prices on both sides fall with bundling. Mixed bundling acts as a price discrimination tool segmenting the market more e¢ ciently and functions as a coordination device helping solve &quot;the chicken or the egg&quot; problem in two-sided markets. After theoretically evaluating the impact mixed bundling has on prices and welfare, we test the model predictions with new data from the portable video game console market. We …nd empirical support for all theoretical predictions

Mixed Bundling in Two-Sided Markets: Theory and Evidence

We extend the traditional literature on bundling and the burgeoning literature on two-sided markets by presenting a theoretical monopoly model of mixed bundling in the context of the portable video game console market--a prototypical two-sided market. It is shown that the monopoly platform's dominant strategy is to offer a mixed bundle rather than pure bundle or no bundle. Deviating from both traditional bundling literature and standard two-sided markets literature, we …find that, under mixed bundling, both the standalone console price on the consumer side and the royalty fee on the game developer side are lower than their counter- parts under independent pricing equilibrium. In our setting, mixed bundling acts as a price discrimination tool segmenting the market more efficiently as well as functions as a coordination device helping solve "the chicken or the egg" problem in two-sided markets. After theoretically evaluating the impact mixed bundling has on prices and welfare, we further test the model predictions with new data from the portable video game console market in the early to middle 2000s, during which Nintendo was a monopolist. We employ a reduced-form approach similar to Jin and Rysman (2009), and …find empirical support for all theoretical predictions