Exploring bundling sale strategy in online service markets with network effects

In recent years, we have witnessed a growing trend for online service companies to offer “bundling sales” to increase revenue. Bundling sale means that a company groups a set of its products/services and charges this bundle at a fixed price, which is usually less than the total price of individual items. In this paper, our goal is to understand the underlying dynamics of bundling, in particular, what is the optimal bundling sale strategy and under what situations it will be more attractive than the separate sales. We focus on online service markets that exhibit network effect. We provide mathematical models to capture the interactions between buyers and sellers, analyze the market equilibrium and its stability, and formulate an optimization framework to determine the optimal sale strategy for the service provider. We analyze the impact of the key factors, including the network effects and operating costs, on the profitability of bundling. We show that bundling is more profitable than separate sale in most cases; however, the heterogeneity of services and the asymmetry of operating costs reduce the advantage of bundling. These findings provide important insights in designing proper sale strategies for online services.