Subadditive Bundle Preferences and the Value of Variety

Product bundles may consist of multiple units of a single product (" uniform " bundles) or multiple units of more than one product (" mixed " bundles). In this paper, we examine consumer evaluations of mixed and uniform bundles. Two factors can explain preferences for mixed bundles. First, consumers may perceive each additional unit of a particular product as possessing less marginal value. Second, consumers may derive value from the variety offered by mixed bundles. In study 1, we demonstrate that although consumers do show diminishing marginal utility for uniform bundles of products, they combine products to form mixed bundles in a subadditive fashion. The observed subadditivity of mixed bundles is in turn consistent with two explanations. Consumers could discount bundles according to the total number of units they contain. Alternatively, consumers could show diminishing marginal utility for product attributes and judge bundles according to the (discounted) value of the attribute inventories in the bundle. In study 2, we show that bundle subadditivity does not vary with brand similarity. Results across both studies are consistent with the theory that consumers have diminishing marginal utility for individual products and for the total number of units in a bundle. 4 Consumers are often confronted with the option of buying goods individually or buying goods together in a bundle. Bundled goods occur across many different industries and product categories. Examples of bundled goods include software suites (e.g., Microsoft Office), bedroom furniture sets, season football tickets, and cases of fruit juice or lunch snacks. Despite the ubiquity of product bundles in the marketplace, little research has explicitly investigated how consumers value bundles of different composition. Why do multi-product bundles exist? The majority of the work examining this question has focused on the benefits that bundles provide to the seller. It is well known, for instance, that bundles of multiple units of a single product allow sellers to achieve second-degree price discrimination, thereby allowing sellers to capture a greater proportion of the consumer surplus (Phlips 1983). Other work has explored the conditions under which selling only bundles of different products (a pure-bundling strategy) or both the bundles and the individual products (a mixed-bundling strategy) will maximize the seller's profit (Adams and Yellen 1976). However, for multi-product bundling to be sustainable, these bundles must also offer value to consumers. What value do consumers derive from bundles? First, consider consumers' response to quantity. Most classical economic models …