1996 Reports

Informational Leverage and the Endogenous Timing of Product Introductions

Choi, Jay Pil

This paper provides a new rationale for bundling based on informational leverage. It is demonstrated that physically tying a product of established quality to one of unknown quality may mitigate the problem of asymmetric information encountered in the latter market. Leveraging reputation in one market to provide information about product quality in a second market can have profound implications for the timing of new product introductions. Bundling motivated by informational leverage can enhance efficiency by timing of product introduction is considered, however, the welfare consequences of bundling are ambiguous. The positive effect of market creation must be weighed against the negative effect of market delay.