Byline: JOEL TANCHUCO and NERIZA DELFINO

A bank extends a real estate loan that must be accompanied by a mortgage or fire insurance policy purchased by the borrower. A car manufacturer suggests the use of its aftersales maintenance services. A canned meat product from a store chain at

times comes free with another item. A computer printer brand of ink refill offers discounted empty ink cartridges with subsequent refills. These examples represent a common practice referred to as bundling. The practice has market and economic implications for consumers, sellers, distributors and policy planners.

What is bundling? It is a pricing strategy which takes many forms, but its principal characteristic is offering a package consisting of two or more goods and services, or a combination of these, that makes the main product more attractive to consumers than purchasing the goods separately.

Sellers who consider bundling should be mindful of the products inherent characteristics. A key requirement is the existence of differences in market demand patterns and the consumers willingness to pay for the different items included in the bundle. The main or lead product should have a higher demand than the tie-in goods comprising the rest of the bundle. But there are situations when consumers prefer the tied-in product and therefore purchase the bundle for just the benefit of purchasing the lead product at essentially a discount. Either way, there is an inducement to demand the bundle and not the different items separately.

With sellers trying to influence consumer preferences, demand for the product should be price inelastic, i.e. higher prices of bundles should not decrease demand for the bundle by a proportionately larger amount. Doing so will negate the benefit to the sellers of offering the bundle. Any reselling of items comprising the bundle should be discouraged and if possible rendered infeasible, because reselling dilutes the inducement provided by the bundle.

The benefits cited in favor of bundling include demand inducement or revenue enhancement. Whether they band together or operate as diversified entities in selling bundled goods, manufacturers benefit from improvements in costs via better scale economies. Distributors and marketing firms using different methods (like direct selling, multilevel marketing and franchising) also stand to benefit with faster movement of inventory. Some industries reeling from the adverse effects of imported substitutes can utilize bundling to enhance competitive positions.

Different forms of bundling abound in practice. The most basic, pure bundling, offers two or more items always offered together with no possibility that the items will be resold separately. Tour packages that include airfare, hotel accommodation and meals, and cable television that brings together different channels, are good examples of pure bundling.

When the market presents varied forms of demand relationships among clearly identifiable consumer classes, one frequently encounters mixed bundling. Here, the bundled products can be sold separately or jointly. Sellers and distributors that resort to mixed bundling often exhibit differentiated costs. Computer distributors offering hardware that comes with software packages and services may essentially bundle products or sell them individually. So do restaurants offering both ala carte and buffet.

Tie-in selling is a form of bundling prevalent in situations when there is a need to coerce consumers to buy combined goods or services. Such arrangements are justified by the enforcement of warranties needed to protect the patent and maintain the quality of the lead product. Car firms that require in-house services at regular mileage intervals are examples of tie-in. Sellers of consumer electronics and distributors of computer software can be similarly classified.

Perhaps the greatest revenue enhancing potential comes from add-on bundling. Landline telephone service providers offer caller identification as an add-on peripheral to their product and service. Franchise owners offer technical services to franchisees in servicing equipment. The effect of enhancing revenue is particularly substantial to sellers who manufacture the product using common productive capabilities.

Cross couponing is another form of bundling common among distributors utilizing the internet and other media to market their products. Consumers who have sourced the good or service through these means are given the opportunity to purchase a product in a coupon at a discount. Selling in this manner can be considered a permutation of bundling, for which the lowered price applies only when the coupon gets redeemed.

Some products, like beauty and health items, are sold exclusively in beauty salons and spas, riding on the well-known name of the establishment. In this instance, in contrast to reduced pricing practices inherent in bundling, a higher price for the bundle is charged. This practice caters to a particular market niche that is not very price sensitive.

The practice of bundling, in its many forms, affects primarily consumers and providers but should also attract the attention of academics and regulators. In some economies, bundling is closely monitored by anti-trust regulators, because bundling can easily lead to anti-competitive behavior. Such is the case for the car manufacturer that regularly requires mileage servicing as indicated in the warranty. Other services not covered by the warranty can be offered at a premium, effectively precluding service shops from providing the same services at lower prices.

Bundling has advantages for manufacturers and service providers. When utilized properly and in timely fashion, bundling can provide increased revenues to suppliers and added benefits to consumers. Creating the proper mix among the different forms of bundling can be a rewarding strategy for sellers.

Dr. Neriza Delfino and Mr. Joel Tanchuco, are assistant professors of the Economics Department, College of Business and Economics, De La Salle University