A Strategic Effect of Bundling on Product Distribution

Purpose - This study examines a bundling effect on production and distribution in a patent-protected industry. Despite the heavy use of bundling strategies in the information and technology industry, literature has paid scant attention to bundling of intellectual property rights. This study examines a theoretical exploration of the bundling effect on licensing behavior. Research design, data, and methodology - To address this behavior, we build a simplified model consisting of three stages: 1) bundling decision, 2) licensing agreement, and 3) competition. The subgame perfect Nash equilibrium is applied to the model. Results - A single-patent holder with superior technology grants its own license to the multiple-patent firm, thereby leaving the market. Anticipating the single right holder's licensing strategy, the multiple-patent firm offers a bundle, making the single-right holder's bargaining position weaker. Conclusions - Bundling is an effective business strategy, resulting in multiple products for a firm as it faces other firms with single-product lines in each market. Taking advantage of the multi-patent or multi-product lines, the firm utilizes the bundling strategy obtaining better technology from the standalone single-patent firms.