Bundling: Examinations of experimental data

More than a price discrimination tool under monopoly and oligopoly environments, bundling has recently been regarded (especially in the information goods' industry) as an effective and profitable entry deterrence strategy against a potential one-product competitor.; This study tries to come up with an experimental analysis to examine the effectiveness of the two-good bundling strategy. Having Nalebuff (1999)'s basic model for theoretical foundation, a set of three games (or treatments)---'independent pricing', 'pure bundling', and 'independent pricing or pure bundling', model both three-stage (the former two treatments) and four-stage, two-person non-cooperative games where subjects face potential entry situations according to different entry costs---'high' and 'low'. These are perfect information games and thus entry costs and payoffs are common knowledge. The equilibria for both 'independent pricing' and 'pure bundling' games entail the incumbent player selecting a price to: (1) deter entry in both 'independent pricing' and 'pure bundling' treatments with 'high' entry costs, and also in the 'pure bundling' treatment with 'low' entry costs; (2) accommodate entry in the 'independent pricing' treatment with 'low' entry costs. As for 'independent pricing or pure bundling' game, the equilibria entail the incumbent player choosing to bundle and selecting a price to deter entry in both 'independent pricing or pure bundling' treatments with 'high' and 'low' entry costs.; While many subjects played according the theoretical predictions, the others never seemed to engage in such equilibria. Especially in both 'pure bundling' and 'independent pricing or pure bundling' treatments with 'low' entry costs, a significant proportion of subjects playing the one-product competitor role entered when it yielded negative payoffs. Past play and different experimental conditions seem to influence subjects' (either playing the incumbent or the one-product competitor role) tendency to engage in the theoretically predicted equilibria.