ABSTRACT
This chapter deals with product differentiation leading to substitutes, complements and bundling of products. Vertically differentiated product ranges offer ascending levels of quality or functionality. These products are substitutes and the seller usually wants the customer to take the most expensive option. Complementary product ranges offer products that complement each other, purchase of one product is likely to lead to further purchases such as paper for a printer. A pure product bundle is offered as a bundle of complementary products that are not offered separately. A mixed product bundle is offered as a bundle, usually at a discount to the sum of the prices of the individual items that can also be purchased separately. There can be reasons for offering a pure bundle although, theoretically, a mixed bundle will usually offer more profit.
Complementary products can be offered at lower prices because the purchase is likely to lead to additional sales. Conversely, the prices of substitutes tend to be increased compared with single product offerings. These relationships are captured in the Niehans formula which applies to both substitutes and complements.
