Multi-Device Consumption of Digital Goods: Optimal Product Line Design with Bundling

Abstract

A contemporary business challenge for bundling theory is the distribution of digital content such as media, entertainment, software, and other information goods. Consumers can use a number of devices to interact with software, online services, music, video, news, and other forms of digital content. For instance, Netflix videos and Kindle ebooks, initially accessed only on television sets and computers, respectively, are now also consumed on smartphones and tablets. Print products are now distributed and consumed both in print and digitally. Firms offer product line designs that include prices for single device access as also bundle discounts for multi-device access, so that consumers can choose a device or even multiple devices. This paper provides guidelines regarding such multi-device product line design and pricing. A starting point is to note that there are many ways to practice bundling, from offering prices for single-device consumption as well as a bundle discount (mixed bundling), to forcing multi-device prices (pure bundling), and designs in between (partial bundling). Picking the best design, and associated prices, is a complex problem due to how single-device demand functions relate to multi-device demand. Recognizing that some dual-device purchases can occur even when there is no bundle discount, the paper develops intuition around the net gain or loss incurred from giving a bundle discount to entice single-device access buyers to dual sales. One surprising finding is that inducing dual sales through bundle discounts can be profitable even when intent to consume multiple times is quite weak, because in this case dual sales would not occur organically. Less surprisingly, such inducement is also profitable when multi-consumption intent is strong, and least attractive when the intent is moderate. When one of the devices is an emerging one or has weak own demand in the short term, then it can be useful to offer a partial bundle, tying sales for the stronger device into a bundle comprising access to both devices. When device valuations are such that consumers generally agree on the rank-ordering of the devices (e.g., if a location-based app offers greater value on a smartphone than on a tablet), then it is best to employ some type of bundling, unless the intent for multi-device consumption is proportionally lower among low-value consumers than for high-value consumers.

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