Issues in Interdisciplinarity 2019-20/Power in corporate aggregation and bundling

Introduction

This wikibook sheds light on the issue of power associated with the increasing trend towards aggregation that corporations are following. Aggregation refers to a company offering a variety of unrelated services. Throughout this wikibook, we also refer to “bundling”, which is defined as “the offering of multiple non-substitutable products for a single, combined price”. Here we focus on both and their benefits for corporations and their effects on consumers.

Why do customers value bundling?

Behavioural economics

According to Hogg, “behavioural economics is the study of economic decision making in the light of advances in psychology”. By focusing on “idiosyncratic psychological ways people make decisions,'' this interdisciplinary field has found that people have bounded rationality when faced with complex situations and will attempt to simplify the decision-making process. Service bundling frequently caters towards that propensity.

Firstly, bundling provides convenience and facility when purchasing services. Due to cognitive limitations, including how collecting and processing all relevant information during decision-making is neither realistic nor efficient for the consumer, humans tend to adopt simple heuristics. Rather than making the most economically optimal decision, consumers simplify the process by only focusing on either price, style etc., because “complex decisions are costly in time and effort”. Bundling offers only “one decision point” that is the easiest and quickest choice and one provider to deal with which requires the least amount of effort. There is only one transaction taking place which is more favourable to consumers since “payments are associated with negative emotions”. Behavioural economics stresses that “consumers are prone to inertia” because of a tendency to exert “least effort to comprehend and evaluate”. Therefore, customers become susceptible to bundling as it simplifies the “mental accounting” process.

Secondly, for customers, categorising their purchases clarifies their financial budgeting, makes the purchase more attractive and ensures the compatibility of the items. During a purchase, the client focuses their attention on the most important product of the bundling but evaluates the total cost by adjusting with the other items. Even if the bundle price isn’t much cheaper than the combined prices of separate items, consumers prefer bundled products. Moreover, discounted prices on bundling encourage the customer to buy sooner than they otherwise would have.

Finally, when a customer builds trust with the supplier and has his products bundled, the customer is less likely to change his providers. By becoming familiar with the products of the brand, instinctively the client is not going to change his consumer habits due to the "status quo". They prefer to stick to old habits and not risk a new brand. However, paradoxically, a person with less experience with the products of a brand is more likely to buy a bundle than a regular buyer.

Why do companies aggregate services?

Information economics

Information economics explores how information affects markets and institutions and, in particular, how imperfect information creates asymmetry, which, in general terms, theorises that inefficient and sub-optimal outcomes in certain markets arise due to an imbalance in information. Companies and corporations then leverage their information to gain further economic power over the consumer and market power over their competitors.

One such example is explored in United States v. Loew's Inc: A Note on Block-Booking. The Supreme Court at the time banned block-booking, which was the practice of bundling films of varying popularity and selling them together to exhibitors, under the grounds that this would be compounding monopolies by using the popularity of more successful films to convince exhibitors to also buy the less successful films. Stigler points out that block-booking does not necessarily force exhibitors to pay more, disputing the Supreme Court's decision. He concludes that pricing by block is instead used to garner more profit.

Something similar happens in corporate aggregation when companies bundle services under a one-time fee or paid subscription. Notably, Amazon has done this with their Prime membership, adding more and more services since they introduced Prime in 2005. Consumers and Amazon have information asymmetry, which Amazon exerts on the consumer, as the consumer has to find pricing for all of Amazon's services separately to overcome the imbalance.

Psychology

Psychology focuses on the key strategy of personalisation which is often employed through the companies’ different aggregated services to ‘trap’ consumers. There are two theories in which psychology argues the merits of aggregation: sense of control and information overload.

As psychology advocates, due to the unique nature of personalisation, consumers almost feel special and in control of their own experience. The need for control is felt within everyone, but particularly the consumer who is often at a loss in the exchange of goods. Moreover, the apparent choice of surrendering data further convinces consumers of a sense of control and power, playing into the intended psychological effects desired by corporations.

Information overload, whilst less prevalent in aggregation, is still an influential psychological concept. Firms limit the choices within services available, which psychologists claim reduces stress on consumers, and makes them more likely to interact with a corporation’s services giving corporations power over what consumers can literally see and use.

Analysis of power from an interdisciplinary perspective

Between economics and psychology, the effects of aggregation are well explored. But more broadly, economics seems to focus on the companies and markets rather than the individual consumer, which psychology covers. This means that, naturally, economics holds more relevance for businesses in terms of practical and quantitative understanding. In general, economics holds greater power in this topic than psychology from the perspective of businesses, which is the primary perspective as only businesses can decide which services to aggregate or products to bundle and the consumer is left relatively powerless.

However, the combination of economics and psychology provides a powerful modelling of human economic behaviour and shows that both disciplines are pertinent in this topic. Bringing psychology to bear on economics issues introduces new concepts such as prospect theory which explains that consumer’s decisions are not always optimal. Another important theory is the dual-conform theory which emphasises that consumers' judgements don't always have rational expectations and thus the cognitive biases in consumer’s decision-making need to be taken into account for a realistic prediction of behaviours. Hence, behavioural economics, as an interdisciplinary field, becomes a powerful tool in understanding “actual consumer behaviour” as it offers a nuanced approach to economic theory and rational behaviour.

Further power is created between the two disciplines, in particular through the oft-ignored similarities that they share, specifically on consumer behaviours. Framing effects and information overload belong in both disciplinary fields and modern researchers are increasingly highlighting this fact. Especially with consumer behaviour, firms may use “price complexity” or provide consumers with insufficient/too much information to make “an appropriate comparison” among bundled services. This helps firms massively cultivate power as they manipulate the ideas within the disciplines to exploit consumers in the consumer-driven world today.

Aggregation is the future business model that firms are steadily adopting. This interdisciplinary approach recognises that consumers are not a monolith and thus, provides firms with the power of corporate aggregation.