Product Line Bundling: Why Airlines Bundle High-End While Hotels Bundle Low-End

Product lines are ubiquitous. For example, Marriott International manages high-end ultra-luxury hotels (e.g., Ritz-Carlton) and low-end economy hotels (e.g., Fairfield Inn). Firms often bundle core products with ancillary services (or add-ons). Interestingly, empirical observations reveal that industries with ostensibly similar characteristics (e.g., customer types, costs, competition, distribution channels, etc.) employ different bundling strategies. For example, airlines bundle high-end first class with ancillary services (e.g., breakfast, entertainment) while hotel chains bundle ancillary services (e.g., breakfast, entertainment) at the low-end. We observe, unlike hotel lines that are highly differentiated at different geographic locations, airlines suffer low core differentiation because all passengers (first-class and economy) are at the same location (i.e., same plane, weather, delays, cancellations, etc.). In general, we find product lines with low core differentiation (e.g., airlines, amusement parks) routinely bundle high-end while product lines with highly differentiated cores (e.g., hotels, restaurants) routinely bundle low-end. High-end bundling makes the high-end more attractive, increasing line differentiation (less intraline competition) while low-end bundling decreases line differentiation. Therefore, bundling allows optimal differentiation given a differentiation constraint (complex costs). Last, firms may use strategic bundling for targeting in their core products; e.g., low-end hotels bundle targeted add-ons unattractive to high-end consumers such as lower-quality breakfasts and slower Internet. Data, as supplemental material, are available at https://doi.org/10.1287/mksc.2016.1004 .