Digital Bundling and Experience Good Selection

We model the potential for a company bundling experience goods to obtain an advantage over conventional individual sales. Using the streaming video industry as an example, we consider the unknown attributes of films. Bundling services can be beneficial by guiding consumers' product selections, leading to increased product consumption. In a fully served market, these additional benefits can allow the service to charge a premium if the utility derived from recommendations exceeds the consumers' discounting due to the product source. This suggests that consumers benefit most when streaming services effectively match unfamiliar goods to their preferences. Using theatrical data and critical review data from film releases as a proxy for demand, the number of critical reviews as a proxy for product familiarity, and data from the Netflix streaming library, we provide empirical evidence that streaming services are more likely to include unfamiliar films in their bundle. Our findings support the premise that effective recommendation increases the demand for unfamiliar films.