Bundle pricing of congested services

Abstract Bundle pricing is commonly adopted by service firms managing multiple congestion-prone service facilities. Under bundle pricing, the firm sells all services as a single package. This scheme is in contrast to à la carte pricing, whereby the firm sells each service separately. The existing theory generally sees bundling as being more lucrative when the marginal cost of production is low. However, little is known about how bundling compares to à la carte pricing in service systems with delay-sensitive customers, despite the prevalence of both practices. Our paper compares these two pricing schemes in congested service systems. We find that the classical prescription can be reversed in such congested service settings even in the absence of any marginal cost of service provision. Specifically, bundling generates less revenue than à la carte pricing when the potential arrival rate of customers is high relative to service capacity or when customers are highly delay-sensitive relative to their valuation of services. Moreover, the relative revenue difference between the two pricing schemes is non-monotone in either the potential arrival rate or delay sensitivity, with the percentage revenue loss from suboptimally practicing bundle pricing being the most substantial when the potential arrival rate or delay sensitivity is intermediate. From an operational perspective, bundle pricing results in higher (resp. lower) capacity utilization and thus more (resp. less) system congestion than à la carte pricing when the potential arrival rate is low (resp. high). For customers, bundling generates higher consumer surplus when the potential arrival rate is low or high, but may generate lower consumer surplus when the potential arrival rate is intermediate. Our results offer normative guidance to service firms considering these two pricing strategies and shed light on their operational and welfare implications.