Operational Role of Retail Bundling and Its Implications in a Supply Chain

Abstract

We study the impacts of retail bundling on a supply chain with a manufacturer and a retailer. The retailer orders a primary product from the manufacturer before demand uncertainty materializes, and can retail it in a bundle with a secondary product afterwards. Our findings reveal three effects of bundling. First, bundling can help a retailer mitigate the adverse consequences of demand uncertainty in the primary product and price‐discriminate customers of the secondary product. Second, bundling can lower the retailer’s wholesale‐price elasticity and partition the retailer’s ordering decision into bundling and no‐bundling regions, between which there is a marked drop in the retailer’s optimal order quantity. Third, bundling affects the manufacturer’s wholesale price decision in an unexpected way: The manufacturer may lower the wholesale price when the retailer bundles. Our analysis shows bundling benefits the manufacturer, but can sometimes hurt the retailer. Further, when uncertainty in retail order is considered, while the manufacturer always benefits from retail bundling in expectation, it might be worse off with bundling depending on the realization of the uncertain market size. This explains why retail bundling has been a concern to some major manufacturers whereas they do not prohibit bundling up front.

Optimal Bundling Strategy for a Retail Platform Under Agency Selling

“…This assumption has been widely adopted in the literature (see Bhargava 2012, 2013, Cao et al. 2015a, 2019, Chakravarty et al. 2013).…”

“…That is, the platform has the flexibility to determine whether to adopt the bundling strategy after the suppliers determine the retail prices, a common setting in the literature (see, e.g., Bhargava 2012, Cao et al. 2015a, 2019).…”

Bundling or not bundling: Sequential bundling in e‐commerce distribution channels

“…Pan et al (2018) studied bundling problem when there are two manufacturers and a retailer, considering product complementarity, product cross elasticity, and spillover effects. Cao et al (2019) examined how retail bundling and demand uncertainty affect supply chain profits. Shao and Li (2019) researched how the retailer's bundling strategy and the manufacturer's product strategy (low or high quality) interact with each other considering channel competition.…”

Distributing the fashion product in direct or retail channel: The impact of fashion level and direct selling cost

“…To the best of our knowledge, the studies related to the distribution of two products in a supply chain mostly focus on operational strategies of the products. For instance, Bhargava (2013) and Cao et al (2019) develop analytical results and insights about whether the bundling of two products can benefit or hurt the firms. Chen et al (2015) assume that two products provided by a firm are substitutable and characterize the firm's optimal inventory policy by considering consumer service objectives.…”

“…For instance, Bhargava (2013) and Cao et al. (2019) develop analytical results and insights about whether the bundling of two products can benefit or hurt the firms. Chen et al.…”