Optimal bundling and pricing decisions for complementary products in a two-layer supply chain

Abstract

This article explores bundling and pricing decisions for two complementary products in a two-layer supply chain consisting of a multi-product manufacturer and a retailer. We establish four different pricing models under cases of decentralized decision, while considering different portfolio-bundling strategies of the manufacturer and the retailer. A game-theoretical method is used to characterize the corresponding equilibrium outcomes in each scenario. By further analyzing and comparing the maximum profits of all four possible scenarios, optimal bundling and pricing decisions for the manufacturer and the retailer are obtained, respectively. Model extensions and numerical examples are enriched to highlight the factors affecting optimal decision-making. Finally, valuable and interesting managerial insights are summarized. Results show that the upstream manufacturer always profits more when he sells complementary products separately. However, the optimal bundling decision of the downstream retailer is jointly determined by product complementarity (as a major factor) and the difference of product profitability (as a secondary factor). Market power cannot exert an influence on both optimal bundling decisions, but it can partly affect pricing decisions.

Keywords

Bundling / complementary products / stackelberg game / supply chain management

References

[1] Adams W., Yellen J.. Commodity bundling and the burden of monopoly. Quarterly Journal of Economics, 1976, 90(3): 475-498.

[2] Armstrong M.. Price discrimination by a many-product firm. Review of Economic Studies, 1999, 66(1): 151-168.

[3] Barry N.. Bundling as an entry barrier. Quarterly Journal of Economics, 2004, 119(1): 159-187.

[4] Bulut Z., Gurler U., Sen A.. Bundle pricing of inventories with stochastic demand. European Journal of Operational Research, 2009, 197(3): 897-911.

[5] Banciu M., Gal-Or E., Mirchandani P.. Bundling strategies when products are vertically differentiated and capacities are limited. Management Science, 2010, 56(12): 2207-2223.

[6] Bhargava H.K.. Retailer-driven product bundling in a distribution channel. Marketing Science, 2012, 31(6): 1014-1021.

[7] Cai Gangshu G., Yue D., Sean Z.. Exclusive channels and revenue sharing in a complementary goods market. Marketing Science, 2012, 31(1): 172-187.

[8] Cao Q., Geng X., Zhang J.. Strategic role of retailer bundling in a distribution channel. Journal of Retailing, 2015, 91(1): 50-67.

[9] Cao Q., Stecke K.E., Zhang J.. The impact of limited supply on a firm’s bundling strategy. Production & Operations Management, 2015, 24(12): 1931-1944.

[10] Chakravarty A., Mild A., Taudes A.. Bundling decisions in supply chains. European Journal of Operational Research, 2013, 231(3): 617-630.

[11] Chen Y.. Equilibrium product bundling. Journal of Business, 1997, 70(1): 85-103.

[12] Chen Y.W., Vakharia A.J., Alptekinoglu A.. Product portfolio strategies: the case of multifunction products. Product and Operations Management, 2008, 17(6): 587-598.

[13] Chen Y.C., Fang S.C., Wen U.P.. Pricing policies for substitutable products in a supply chain with Internet and traditional channels. European Journal of Operational Research, 2013, 224(3): 542-551.

[14] Chung H.L., Lin Y.S., Hu J.L.. Bundling strategy and product differentiation. Journal of Economics, 2013, 108(3): 207-229.

[15] Ernst R., Kouvelis P.. The effects of selling packaged goods on inventory decisions. Management Science, 1999, 45(8): 1142-1155.

[16] Fang H., Norman P.. To bundle or not to bundle. RAND Journal of Economics, 2005, 37(4): 946-963.

[17] Guiltinan J.P.. The price bundling of services: a normative framework. Journal of Marketing, 1987, 51(2): 74-85.

[18] Gurler U., Oztop S., Sen A.. Optimal bundle formation and pricing of two products with limited stock. International Journal of Production Economics, 2009, 118(2): 442-462.

[19] Girju M., Ashutosh P., Ratchford B.T.. Pure components versus pure bundling in a marketing channel. Journal of Retailing, 2013, 89(4): 423-437.

[20] Kurata H., Yao D.Q., Liu J.J.. Pricing policies under direct vs. indirect channel competition and national vs. store brand competition. European Journal of Operational Research, 2007, 180(1): 262-281.

[21] Lus B., Muriel A.. Measuring the impact of increased product substitution on pricing and capacity decisions under linear demand models. Product and Operations Management, 2009, 18(1): 95-113.

[22] Matutes C., Regibeau P.. Compatibility and bundling of complementary goods in a duopoly. Journal of Industrial Economics, 1992, 40(1): 37-54.

[23] Economic Letters, 1999, 62(3):