Bundling

Sell two things together as one package and you change the economics of both. Bundling is a deceptively powerful pricing and competitive tool.

Bundling is the practice of selling two or more products together as a single combined package, often at a price different from the sum of their separate prices. It is a ubiquitous strategy, from software suites to cable packages to value meals, and it serves purposes that range from the benign to the anti-competitive.

Why firms bundle

Bundling can benefit both firm and customer. It can cut costs, since selling and packaging combined products is cheaper than selling each alone, and it can offer convenience and value to customers who want the whole package. More subtly, bundling helps firms capture more value when customers differ in how they value the components. By combining products, a firm can sell to customers with diverse tastes at a single price that extracts more total willingness to pay than pricing each item separately would, a form of price discrimination that smooths out the variation in what individual items are worth to different buyers.

Pure and mixed bundling

Bundling takes different forms. Pure bundling offers the products only as a package, with no option to buy them separately. Mixed bundling offers both the bundle and the individual components, letting customers choose, usually with the bundle priced attractively to steer them toward it. Mixed bundling is generally more flexible and common, since it captures both those who want the package and those who want only one item, while pure bundling is more aggressive and more likely to raise competitive concerns.

When bundling harms competition

Bundling becomes a competition concern when a firm uses it to extend market power from one product to another. A firm dominant in one product can bundle it with a second, where it faces competition, forcing customers who want the must-have product to take the second as well, and so foreclosing rivals in the second market who cannot match the bundle. This leveraging of power across products, especially by a dominant firm, is what draws the scrutiny of competition authorities, who must distinguish it from the many forms of bundling that are efficient and pro-consumer.

Bundling is a versatile strategy that can create genuine value, through cost savings, convenience, and better matching of price to willingness to pay, or can entrench market power by leveraging dominance from one product into another. Its ambiguity, the same practice serving efficiency in one case and foreclosure in another, is what makes it both a staple of pricing strategy and a recurring puzzle for competition policy.