Academic journal article Journal of Housing Research

The Preference for Housing Option Bundling

Academic journal article Journal of Housing Research

The Preference for Housing Option Bundling

Article excerpt

Abstract

Bundling of products or features is a familiar phenomenon and has been studied and modeled in industrial organization models, consumer theory and marketing. Using a survey of housing preferences for American households, this study examines consumer preferences for "all-inclusive" bundles of amenities and features in housing versus the "option selection mode" of choice. This study also examines differences among population groups in the distribution of choice preference modes and preferences for some specific housing options, and analyzes the impact of factors such as housing tenure, wealth, race and education preferences. The findings indicate that there are significant differences in the preferences for the two modes by racial group, level of schooling, level of income and several other variables.

Introduction

There are two modes of choice by which consumers may purchase housing (and some other goods). Under the "option selection mode," consumers are offered a "basic" house, together with the possibility of adding assorted features and amenities in exchange for incremental payments. Such a mode of choice is more likely to be applicable when purchasing new housing from a contractor before the unit is completed, or when prospective buyers are offered additional amenities in a menu, each for a price. A second mode of purchase is where consumers are offered a completed home "as is," containing a specific mix of housing features or amenities, which they may either purchase or refuse. This second mode will be referred to here as the "all-inclusive" choice mode and it represents a form of product "bundling."

Bundling is a common phenomenon in consumer and other markets, and has been the focus of considerable research, although little in the housing literature. There are clearly both supply- and demand-side considerations in bundling, although the emphasis here will be on the demand side.1 The coexistence of "all-inclusive" bundling of features alongside "option selection" modes of choice is common in a number of markets, ranging from vacation packages to mutual funds of securities. Both modes can be found in automobile markets, computers, cable television and many other markets. Little is known about the preferences of home purchasers for the two modes, or about differences in these preferences across socioeconomic and racial groups.

Preferences for bundling carry implications for the large literature on hedonic pricing analysis of housing. In hedonic models, the underlying assumption is that individual housing components can be individually priced by separating out their contribution to the total price, using econometrics. This separation presumably captures subjective tradeoffs among variables in the utility functions of consumers, which ultimately are reflected in housing market prices. But if consumers themselves are reluctant to perform such tradeoffs, that is, if consumers themselves prefer bundled housing components and lose utility for some reason if forced to conduct tradeoffs among the features that underlie the hedonic representation, then the hedonic models may be producing biased estimations. Tolerance or preference for option selection may ultimately result in a better "match," that is, in a housing purchase that more closely fits the inherent preferences of the consumer, than bundled housing, indirectly contributing to consumer utility.

Hence, understanding consumer attitudes towards bundling is all the more relevant. The difference between bundling of features in housing and the option selection mode carries implications for how hedonic pricing models are interpreted and whether they are biased, for the reason noted above. When the "option mode" operates, consumers may literally contract separately to purchase individual features being offered as increments to a house, based on the shadow or hedonic prices of these. But if the option mode involves a loss in utility due to consumer reluctance to use it, or gain in utility due to preference for it, this will affect the accuracy of empirical estimations. …

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