Why bundle discounts can be a profitable alternative to competing on price promotions

Price promotions and bundling have been two of the most widely used marketing tools in industry practice. Past literature has assumed that firms respond to price promotions by promoting a product in the same category. In this paper, we extend this literature as well as the bundling literature by considering the possibility that a firm may respond to a competitor's price promotions by also offering a cross-buying or bundling discount. Using a game-theoretic model, we show that bundle discounts can help increase profits in a competitive market by creating endogenous loyalty, thereby reducing the intensity of promotional competition. We also find that bundle discounts can be used as an effective defensive marketing tool to prevent customer defection to the competition.