Impact of Customer Knowledge Heterogeneity on Bundling Strategy

We consider a marketer of components who can select one of three alternative pricing strategies: (1) a pure component strategy (i.e., the customer can only buy the components individually), (2) a pure bundling strategy (i.e., the components must be purchased together), or (3) a mixed bundling strategy (i.e., the customer may buy a component individually, or buy the bundle). We consider a market where customer knowledge of components varies and propose that a high-knowledge customer can determine with greater certainty whether a given component is useful to her. Consequently, more knowledgeable customers have higher variability in their reservation price of a component. Using an analytical model, we identify the conditions under which each of the three pricing strategies maximizes profit and show that three factors determine the optimal strategy: marginal costs of components, distribution of knowledge over the customer population, and relative sizes of customer segments where each segment is interested in the same subset of components. Managerial implications and directions for future research are discussed.