Essays On Hybrid Bundle Pricing

Increasingly, firms are offering hybrid bundles ? products that combine both good(s) and service(s). Some hybrid bundles, such as TiVo that combines a DVR and recording management are more visible, while some, such as GE?s Powerplant System that includes a nuclear power plant and maintenance/project management are more obscure. While pricing strategies for a goods bundle have been well-studied, services bundles have been underexplored. Hybrid bundles, which are fundamentally different from bundles of goods or services, have received even less attention. In this dissertation, three essays offer important insights into different aspects of hybrid bundle pricing and provide important managerial implications and guidelines. Essay I develops an analytic model of optimal pricing for hybrid bundles by a monopolist. My results show that an increase in quality variability of the service is generally associated with a higher optimal hybrid bundle price and a lower optimal price of the good, but lower overall bundle profit. They also reveal that the optimal price of the service (good) in a hybrid bundle is higher (lower) when the good has diminishing unit cost and the service has constant unit cost. Essay II examines the effects of quality variability, independence, and complementarity on willingness-to-pay for hybrid bundle components using conjoint analysis experiments. The results show that higher quality variability of a service is associated with a wider distribution of willingness-to-pay, that independence between the good and the service has positive direct- and cross-effects on willingness-to-pay, that complementarity between components has a greater positive effect on the willingness-to-pay for the service than for the good, and that independence and complementarity interact to increase willingness-to-pay. Essay III develops a general model for the pricing of hybrid bundles offered in a competitive setting. I estimate the model using empirical data of a hybrid bundle comprising carpet and installation. The results show that the price of the service plays a crucial role in the demands of both the good and service and that the service cross-price effect on the demand for the good can be substantially higher than the direct-price effect of the good on its own demand.