The Impact of Limited Supply on a Firm's Bundling Strategy

Abstract

A firm's two-product bundling decision is examined when the supply of one product is limited and consumer valuations are normally distSteckeributed. The firm can choose to sell products separately and/or through a bundle. We find that the impact of limited supply on a firm's bundling decision depends on the correlation between the consumer valuations of the two products as well as the symmetry level of the two products in terms of their attractiveness (how much they are valued by consumers). When the valuation correlation is high and the symmetry level of the two products is low, limited supply can drive bundling. When the valuation correlation is low or the symmetry level is high, limited supply can drive no bundling. When the attractiveness of both products are low or the valuation correlation is very high, limited supply has no impact on a firm's bundling decision: The firm should not bundle for all supply levels.This study offers a new driver for product bundling: the limited supply of a product. The existing bundling literature suggests that a firm should bundle symmetric products that have a low consumer valuation correlation, when bundling is driven by consumer valuation heterogeneity reduction. In contrast, when bundling is driven by limited supply, a firm should bundle asymmetric products with a high consumer valuation correlation. The benefit of supply-driven bundling depends on the severity of supply limitation. When supply limitation is moderate, bundling creates value by expanding the market of the less attractive product. When supply limitation is severe, bundling enables a firm to extract a higher margin from the less attractive product.

How Add‐on Pricing Interacts with Distribution Contracts

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Bundling cloud software to fight piracy: an economic analysis

“…When PB and MB are compared, MB is more profitable if there are substantial differences (heterogeneity) in the valuation of the second product (Pierce and Winter, 1996). Recently, some studies have extended the bundling studies by incorporating other elements, such as the effect of network externalities (Prasad et al , 2010; Pang and Etzion, 2012) and capacity limit (Cao et al , 2015). In this paper, we extend the existing bundling literature by considering piracy, which is especially relevant to information goods.…”

A bundling strategy for items with different quality based on functions involving the minimum of two random variables

“…The level of cooperation between suppliers within a decentralized supply chain was found to influence the bundling decisions and profitability. 6 Cao et al 7 investigated bundling strategies driven by the limited supply of a product. The benefits of such supply-driven bundling strategy depend on the severity of supply limitation.…”

“…The impacts of different bundling strategies, such as pure or mixed, for information products have been compared by Li et al 5 Existing research studies addressing recent directions in the area of bundling have identified a number of factors influencing bundling decisions. Such aspects and considerations include the following: bundling in supply chain, 6,7 product bundling in a distribution channel, 8 optimal composition and pricing, 2 bundling of complementary products, 9 customized bundling, 10 and product heterogeneity and risk considerations. 11 Rao et al 12 investigated emerging trends in product bundling by extending this concept to various new settings.…”