Bundling Variety, Usage, or Both? A Multi-Service Analysis of Pay-Per-Use and Subscription Pricing

Abstract

We depart from the classic bundling literature on single-unit purchases and develop a multi-unit demand model in which customers decide both the variety and volume of their purchased products. We integrate product bundling with two commonly used usage-based pricing schemes in the service industry, pay-per-use and subscriptions, and examine pricing tactics that span both variety and usage. Our model captures customers' diminishing margins of consumption, and we demonstrate an intricate interplay between product variety and usage that enriches existing results on the dominance of pure bundling over component selling in the classic single-unit demand model. Specifically, with multi-unit demands, component selling can outperform pure bundling under pay-per-use, whereas the reversal is true under subscriptions. We also analyze mixed bundling (on either variety or usage) and nonlinear pricing, and demonstrate how to leverage these more advanced pricing schemes for better revenues. Our results provide novel insights into firms' bundling strategies jointly on variety and usage. Collectively, they highlight the critical role of the customer demand model (single-unit versus multi-unit) in driving monopoly firms' strategic choice of product (un)bundling.

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