Research

Product Bundling Can Lead to Market Distortions

A pricing dispute last October between News Corporation’s Fox Television and major cable provider Cablevision left three million households in New York and Pennsylvania unable to watch popular shows like “Glee,” “Bones” and the Giants-Lions football game. The black-out stemmed from Fox’s demand for much higher retransmission fees for bundled channels. Irate subscribers pressured Cablevision to fix the situation.

“These pricing disputes are common in the television industry and can be costly to the retailer when a manufacturer in a vertical distribution channel has enough market power to impose higher prices,” says Professor Hemant Bhargava, whose recent research examines the economics of product bundling, which can be substantially altered by the product distribution structure.

His study, “Product Bundling in a Vertical Distribution Channel,” earned the 2010 eBusiness best paper award from INFORMS (Institute for Operations Research and the Management Sciences), the world’s largest professional society for operations research.

In it, Bhargava developed and analyzed a theoretical model on product aggregation strategies used by manufacturers and retailers. Companies such as online music distributors, PC manufacturers and TV programmers often bundle products to make more profits than selling them separately.

“A simple example is Microsoft, which packages Word, Excel, Outlook and PowerPoint into versions of Office and sells the bundle to more types of consumers and businesses,” Bhargava explains.

He said bundles created and priced by the retailer in a vertical distribution channel, such as the Fox-Cablevision example, results in market inefficiencies and distortions “because the distribution channel lacks coordination and positions the retailer as a buffer between the manufacturer and actual demand for the product.”

Bhargava has presented this research at the University of Utah’s Eccles School of Business, UC Irvine’s Merage School of Business, the Indian School of Business, and the University of Texas Dallas, School of Management’s Frontiers of Research in Marketing Conference.

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