31 May 2008

Bundles and Bundling

In economics, a "bundle" is a group of goods that are associated in some way. The most common context is in welfare economics, in the sense of an indifference curve. Each point on the indifference curve represents a different bundle of goods A and B; each point, that is, represents different quantities of each. Naturally, if one doesn't need to draw a diagram, one could use the same equations to solve problems involving bundles of many commodities; although technically, 10 different goods in a bundle means a 10-dimensional "indifference surface."

Commodity bundles are an important topic of interest for determining the true rate of inflation, the true purchasing power parity of currencies, or the actual rate of poverty in different times and places. Since inflation affects different commodities to different degrees, the difficulty lies in deciding how much weight to assign to each good.

A more interesting context for the idea of bundles is in analyzing the economics of goods that are really a group, or bundle, of simpler goods. An example of this is the financial services sector, which spent several centuries developing the concept of a merchant banking account, and then suddenly decided that what customers really wanted was all of these services sold separately:
The reason that growth has continued despite adversity, or perhaps because of it, is that these new financial instruments are an increasingly important vehicle for unbundling risks. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it. This unbundling improves the ability of the market to engender a set of product and asset prices far more calibrated to the value preferences of consumers than was possible before derivative markets were developed. The product and asset price signals enable entrepreneurs to finely allocate real capital facilities to produce those goods and services most valued by consumers,...
Alan Greenspan, remarks, 19 March 1999 (PDF)
Customers are expected to buy all of the separate features of a bank account separately, possibly from different vendors, and most likely as computer-generated securities. It bears noting that consumers may neither want to, nor be able to, supplant the expertise of an actual bank manager. Nevertheless, the fact that banking services have indeed been unbundled—i.e., detached from each other and sold separately—has allowed banks to establish what customers are actually prepared to pay for.



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