Working Paper: CEPR ID: DP13040
Authors: Lus M. B. Cabral; Gabriel Natividad
Abstract: Many DVD titles are sold in retail stores in bundles, typically a bundle of two different titles with common characteristics: same lead actor/actress, same director, same genre, etc. This suggests that consumer valuations are positively correlated across the bundle components, which in turn runs counter to the received wisdom that bundling is most profitable when valuations are negatively correlated.In this paper, we propose a solution to this puzzle, one that is based on the observation that DVDs are sequentially released durable goods. At the time the second title is released, it is likely that high-valuation buyers will have bought the first one. For this reason, even though ex-ante valuations are positively correlated, ex-post -- that is, at the time the second title is released -- valuations are negatively correlated.We provide sufficient conditions such that mixed bundling increases revenues and the revenue increase is greater the more positively correlated valuations are. We also provide empirical confirmation of this prediction as well as an independent estimate from a calibrated analytical model.
Keywords: mixed bundling; price discrimination; durable goods
JEL Codes: L10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Mixed bundling (M31) | Revenues (H27) |
| Similarity among bundled titles (C71) | Revenues (H27) |
| Standard deviation of release dates (C46) | Revenue gains (H27) |
| Standard deviation of user ratings (C46) | Revenue gains (H27) |