Customized Bundling and Consumption Variety of Digital Information Goods

Abstract

Customized bundling retail strategies have become increasing popular online. In customized bundling, consumers decide the bundle’s components, and the impacts of this change on consumption variety have important implications for information good retailers. Although reduction in transaction and search costs increases supply-side product variety, customized bundling can introduce new types of friction in the consumption process. We show that customization of information good bundles reduces consumption variety through two effects: design cost effects and compromise effects. We present the results of three behavioral experiments and an empirical study using sales data from a national music retailer. This study contributes to the theoretical understanding of the impacts of customized bundling on search costs and demand-side dynamics. The results also provide insights for information goods retailers on the effects of design and search costs on consumer purchasing behavior. Additionally, implications for the design of retail platforms for customizable information goods are discussed.

Keywords: behavioral economics, bundling, customization, e-commerce, information goods