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

Author

Listed:
  • Qingning Cao
  • Kathryn E. Stecke
  • Jun Zhang

Abstract

type="main" xml:id="poms12388-abs-0001"> 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.

Suggested Citation

  • Qingning Cao & Kathryn E. Stecke & Jun Zhang, 2015. "The Impact of Limited Supply on a Firm's Bundling Strategy," Production and Operations Management, Production and Operations Management Society, vol. 24(12), pages 1931-1944, December.
  • Handle: RePEc:bla:popmgt:v:24:y:2015:i:12:p:1931-1944
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    File URL: http://hdl.handle.net/10.1111/poms.2015.24.issue-12
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    Cited by:

    1. Zhang, Guoquan & Li, Guohao & Shang, Jennifer, 2023. "Optimizing mixed bundle pricing strategy: Advance selling and consumer regret," Omega, Elsevier, vol. 115(C).
    2. Qingning Cao & Xianjun Geng & Jun Zhang, 2022. "Impact of channel structure on a manufacturer's bundling decision with an application to digital goods," Production and Operations Management, Production and Operations Management Society, vol. 31(4), pages 1679-1697, April.
    3. Gökgür, Burak & Karabatı, Selçuk, 2019. "Dynamic and targeted bundle pricing of two independently valued products," European Journal of Operational Research, Elsevier, vol. 279(1), pages 184-198.

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