IDEAS home Printed from https://ideas.repec.org/a/eee/jouret/v91y2015i1p50-67.html
   My bibliography  Save this article

Strategic Role of Retailer Bundling in a Distribution Channel

Author

Listed:
  • Cao, Qingning
  • Geng, Xianjun
  • Zhang, Jun

Abstract

We study retailer bundling in a distribution channel when the manufacturer for one bundled product can strategically set the wholesale price. We show that the retailer can use a bundling option as a strategic leverage to extract concessions from the manufacturer in form of a lower wholesale price. This finding contributes a novel rationale for retailer bundling to the bundling literature. Whenever the bundling option causes this concession-extraction effect, the retailer always benefits from the lower wholesale price. The manufacturer, nevertheless, does not necessarily suffer because bundling can lead to a higher consumer demand. We also show that the manufacturer's marginal production cost plays a critical role in driving the retailer's bundling decision, concession extraction behavior and consequently the total channel profit.

Suggested Citation

  • Cao, Qingning & Geng, Xianjun & Zhang, Jun, 2015. "Strategic Role of Retailer Bundling in a Distribution Channel," Journal of Retailing, Elsevier, vol. 91(1), pages 50-67.
    • Handle: RePEc:eee:jouret:v:91:y:2015:i:1:p:50-67
    DOI: 10.1016/j.jretai.2014.10.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0022435914000712
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jretai.2014.10.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Anne T. Coughlan & Birger Wernerfelt, 1989. "On Credible Delegation by Oligopolists: A Discussion of Distribution Channel Management," Management Science, INFORMS, vol. 35(2), pages 226-239, February.
    2. Yuxin Chen & Sridhar Moorthy & Z. John Zhang, 2005. "Research Note---Price Discrimination After the Purchase: Rebates as State-Dependent Discounts," Management Science, INFORMS, vol. 51(7), pages 1131-1140, July.
    3. Ganesh Iyer, 1998. "Coordinating Channels Under Price and Nonprice Competition," Marketing Science, INFORMS, vol. 17(4), pages 338-355.
    4. Whinston, Michael D, 1990. "Tying, Foreclosure, and Exclusion," American Economic Review, American Economic Association, vol. 80(4), pages 837-859, September.
    5. S. Chan Choi, 1991. "Price Competition in a Channel Structure with a Common Retailer," Marketing Science, INFORMS, vol. 10(4), pages 271-296.
    6. Hemant K. Bhargava, 2012. "Retailer-Driven Product Bundling in a Distribution Channel," Marketing Science, INFORMS, vol. 31(6), pages 1014-1021, November.
    7. Sreekumar R. Bhaskaran & Stephen M. Gilbert, 2009. "Implications of Channel Structure for Leasing or Selling Durable Goods," Marketing Science, INFORMS, vol. 28(5), pages 918-934, 09-10.
    8. Jagmohan Raju & Z. John Zhang, 2005. "Channel Coordination in the Presence of a Dominant Retailer," Marketing Science, INFORMS, vol. 24(2), pages 254-262, February.
    9. Hanming Fang & Peter Norman, 2006. "To bundle or not to bundle," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 946-963, December.
    10. Preyas Desai & Sunder Kekre & Suresh Radhakrishnan & Kannan Srinivasan, 2001. "Product Differentiation and Commonality in Design: Balancing Revenue and Cost Drivers," Management Science, INFORMS, vol. 47(1), pages 37-51, January.
    11. Yunchuan Liu & Z. John Zhang, 2006. "Research Note—The Benefits of Personalized Pricing in a Channel," Marketing Science, INFORMS, vol. 25(1), pages 97-105, 01-02.
    12. Mills, David E, 1995. "Why Retailers Sell Private Labels," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 509-528, Fall.
    13. K. Sridhar Moorthy & I. P. L. Png, 1992. "Market Segmentation, Cannibalization, and the Timing of Product Introductions," Management Science, INFORMS, vol. 38(3), pages 345-359, March.
    14. Koen Pauwels & Shuba Srinivasan, 2004. "Who Benefits from Store Brand Entry?," Marketing Science, INFORMS, vol. 23(3), pages 364-390, July.
    15. Nanda Kumar & Surendra Rajiv & Abel Jeuland, 2001. "Effectiveness of Trade Promotions: Analyzing the Determinants of Retail Pass Through," Marketing Science, INFORMS, vol. 20(4), pages 382-404, August.
    16. Tony Haitao Cui & Jagmohan S. Raju & Z. John Zhang, 2007. "Fairness and Channel Coordination," Management Science, INFORMS, vol. 53(8), pages 1303-1314, August.
    17. Barry Nalebuff, 2004. "Bundling as an Entry Barrier," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 159-187.
    18. Amiya Basu & Padmal Vitharana, 2009. "—Impact of Customer Knowledge Heterogeneity on Bundling Strategy," Marketing Science, INFORMS, vol. 28(4), pages 792-801, 07-08.
    19. Anderson, Simon P. & Leruth, Luc, 1993. "Why firms may prefer not to price discriminate via mixed bundling," International Journal of Industrial Organization, Elsevier, vol. 11(1), pages 49-61, March.
    20. Yunchuan Liu & Rajeev K. Tyagi, 2011. "The Benefits of Competitive Upward Channel Decentralization," Management Science, INFORMS, vol. 57(4), pages 741-751, April.
    21. Preyas Desai & Oded Koenigsberg & Devavrat Purohit, 2004. "Strategic Decentralization and Channel Coordination," Quantitative Marketing and Economics (QME), Springer, vol. 2(1), pages 5-22, March.
    22. Tony Haitao Cui & Jagmohan S. Raju & Z. John Zhang, 2008. "A Price Discrimination Model of Trade Promotions," Marketing Science, INFORMS, vol. 27(5), pages 779-795, 09-10.
    23. Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," The Journal of Business, University of Chicago Press, vol. 57(1), pages 211-230, January.
    24. Timothy W. McGuire & Richard Staelin, 1983. "An Industry Equilibrium Analysis of Downstream Vertical Integration," Marketing Science, INFORMS, vol. 2(2), pages 161-191.
    25. Abel P. Jeuland & Steven M. Shugan, 1983. "Managing Channel Profits," Marketing Science, INFORMS, vol. 2(3), pages 239-272.
    26. Gangshu (George) Cai & Yue Dai & Sean X. Zhou, 2012. "Exclusive Channels and Revenue Sharing in a Complementary Goods Market," Marketing Science, INFORMS, vol. 31(1), pages 172-187, January.
    27. Anthony Dukes & Yunchuan Liu, 2010. "In-Store Media and Distribution Channel Coordination," Marketing Science, INFORMS, vol. 29(1), pages 94-107, 01-02.
    28. Bikram Ghosh & Subramanian Balachander, 2007. "Research Note--Competitive Bundling and Counterbundling with Generalist and Specialist Firms," Management Science, INFORMS, vol. 53(1), pages 159-168, January.
    29. Anne T. Coughlan, 1985. "Competition and Cooperation in Marketing Channel Choice: Theory and Application," Marketing Science, INFORMS, vol. 4(2), pages 110-129.
    30. Narasimhan, Chakravarthi & Wilcox, Ronald T, 1998. "Private Labels and the Channel Relationship: A Cross-Category Analysis," The Journal of Business, University of Chicago Press, vol. 71(4), pages 573-600, October.
    31. K. Sridhar Moorthy, 1987. "Comment—Managing Channel Profits: Comment," Marketing Science, INFORMS, vol. 6(4), pages 375-379.
    32. Mark Armstrong, 1999. "Price Discrimination by a Many-Product Firm," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 151-168.
    33. Ashutosh Prasad & R. Venkatesh & Vijay Mahajan, 2010. "Optimal Bundling of Technological Products with Network Externality," Management Science, INFORMS, vol. 56(12), pages 2224-2236, December.
    34. Jeffrey D. Shulman & Anne T. Coughlan & R. Canan Savaskan, 2010. "Optimal Reverse Channel Structure for Consumer Product Returns," Marketing Science, INFORMS, vol. 29(6), pages 1071-1085, 11-12.
    35. Rajiv Lal, 1990. "Improving Channel Coordination Through Franchising," Marketing Science, INFORMS, vol. 9(4), pages 299-318.
    36. Chen, Yongmin, 1997. "Equilibrium Product Bundling," The Journal of Business, University of Chicago Press, vol. 70(1), pages 85-103, January.
    37. Eitan Gerstner & James D. Hess, 1995. "Pull Promotions and Channel Coordination," Marketing Science, INFORMS, vol. 14(1), pages 43-60.
    38. Liang Guo, 2009. "The Benefits of Downstream Information Acquisition," Marketing Science, INFORMS, vol. 28(3), pages 457-471, 05-06.
    39. Yunchuan Liu & Tony Haitao Cui, 2010. "The Length of Product Line in Distribution Channels," Marketing Science, INFORMS, vol. 29(3), pages 474-482, 05-06.
    40. R. Venkatesh & Wagner Kamakura, 2003. "Optimal Bundling and Pricing under a Monopoly: Contrasting Complements and Substitutes from Independently Valued Products," The Journal of Business, University of Chicago Press, vol. 76(2), pages 211-232, April.
    41. Mihai Banciu & Esther Gal-Or & Prakash Mirchandani, 2010. "Bundling Strategies When Products Are Vertically Differentiated and Capacities Are Limited," Management Science, INFORMS, vol. 56(12), pages 2207-2223, December.
    42. R. Preston McAfee & John McMillan & Michael D. Whinston, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 371-383.
    43. Jagmohan S. Raju & Raj Sethuraman & Sanjay K. Dhar, 1995. "The Introduction and Performance of Store Brands," Management Science, INFORMS, vol. 41(6), pages 957-978, June.
    44. Jiwoong Shin & K. Sudhir, 2010. "A Customer Management Dilemma: When Is It Profitable to Reward One's Own Customers?," Marketing Science, INFORMS, vol. 29(4), pages 671-689, 07-08.
    45. Skander Essegaier & Sunil Gupta & Z. John Zhang, 2002. "Pricing Access Services," Marketing Science, INFORMS, vol. 21(2), pages 139-159, June.
    46. William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(3), pages 475-498.
    47. Ramanathan Subramaniam & R. Venkatesh, 2009. "Optimal Bundling Strategies in Multiobject Auctions of Complements or Substitutes," Marketing Science, INFORMS, vol. 28(2), pages 264-273, 03-04.
    48. Subramanian Balachander & Bikram Ghosh & Axel Stock, 2010. "Why Bundle Discounts Can Be a Profitable Alternative to Competing on Price Promotions," Marketing Science, INFORMS, vol. 29(4), pages 624-638, 07-08.
    49. McCardle, Kevin F. & Rajaram, Kumar & Tang, Christopher S., 2007. "Bundling retail products: Models and analysis," European Journal of Operational Research, Elsevier, vol. 177(2), pages 1197-1217, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chen, Ting & Shan, Feifei & Yang, Feng & Xu, Fengmei, 2023. "Online retailer bundling strategy in a dual-channel supply chain," International Journal of Production Economics, Elsevier, vol. 259(C).
    2. Angelika Endres & Joachim Heinzel, 2019. "The Impact of Product Qualities on Downstream Bundling in a Distribution Channel," Working Papers CIE 127, Paderborn University, CIE Center for International Economics.
    3. Ji, Xiang & Sun, Jiasen & Wang, Zebin, 2017. "Turn bad into good: Using transshipment-before-buyback for disruptions of stochastic demand," International Journal of Production Economics, Elsevier, vol. 185(C), pages 150-161.
    4. Qianbo Yin & Kwei‐Long Huang & Chia‐Wei Kuo & Sean X. Zhou, 2021. "Add‐On Pricing in a Distribution Channel," Production and Operations Management, Production and Operations Management Society, vol. 30(11), pages 4069-4088, November.
    5. Zhang, Guoquan & Li, Guohao & Shang, Jennifer, 2023. "Optimizing mixed bundle pricing strategy: Advance selling and consumer regret," Omega, Elsevier, vol. 115(C).
    6. Angelika Endres-Fröhlich & Joachim Heinzel, 2022. "The Impact of Product Qualities on Downstream Bundling in a Distribution Channel," Working Papers Dissertations 90, Paderborn University, Faculty of Business Administration and Economics.
    7. 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.
    8. Sarat Kumar Jena & Abhijeet Ghadge, 2022. "Product bundling and advertising strategy for a duopoly supply chain: a power-balance perspective," Annals of Operations Research, Springer, vol. 315(2), pages 1729-1753, August.
    9. Kopczewski, Tomasz & Sobolewski, Maciej & Miernik, Ireneusz, 2018. "Bundling or unbundling? Integrated simulation model of optimal pricing strategies," International Journal of Production Economics, Elsevier, vol. 204(C), pages 328-345.
    10. Wen-wen Ren & Yong Liu & Qi Zhang & Xiao-ying Wang, 2022. "Sales strategies considering consumer purchasing preferences for imperfect complementary products," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 21(2), pages 164-182, April.
    11. Tang, Yuanzhao & Perera, Sandun C. & Cao, Qingning & Ji, Xiang, 2023. "Supplier versus platform bundling: Optimal strategies under agency selling," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 179(C).
    12. Meyer, Jeffrey & Shankar, Venkatesh, 2016. "Pricing Strategies for Hybrid Bundles: Analytical Model and Insights," Journal of Retailing, Elsevier, vol. 92(2), pages 133-146.
    13. Xiaolong Guo & Shengming Zheng & Yugang Yu & Fuqiang Zhang, 2021. "Optimal Bundling Strategy for a Retail Platform Under Agency Selling," Production and Operations Management, Production and Operations Management Society, vol. 30(7), pages 2273-2284, July.
    14. Hao, Caixia & Yang, Lei, 2023. "Resale or agency sale? Equilibrium analysis on the role of live streaming selling," European Journal of Operational Research, Elsevier, vol. 307(3), pages 1117-1134.
    15. Ata Allah Taleizadeh & Masoumeh Sadat Babaei & Seyed Taghi Akhavan Niaki & Mahsa Noori-daryan, 2020. "Bundle pricing and inventory decisions on complementary products," Operational Research, Springer, vol. 20(2), pages 517-541, June.
    16. Pan, Fei & Pan, Shenle & Zhou, Wei & Fan, Tijun, 2022. "Perishable product bundling with logistics uncertainty: Solution based on physical internet," International Journal of Production Economics, Elsevier, vol. 244(C).
    17. Cao, Qingning & Tang, Yuanzhao & Perera, Sandun & Zhang, Jianqiang, 2022. "Manufacturer- versus retailer-initiated bundling: Implications for the supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 157(C).
    18. Angelika Endres & Joachim Heinzel, 2019. "The Impact of Product Qualities on Downstream Bundling in a Distribution Channel," Working Papers CIE 124, Paderborn University, CIE Center for International Economics.
    19. Mark Bender & Esther Gal‐Or & Tansev Geylani, 2022. "The emergence of streaming and its impact on pricing and product strategies of content providers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 2148-2171, September.
    20. Haiyan Shan & Chen Zhang & Guo Wei, 2020. "Bundling or Unbundling? Pricing Strategy for Complementary Products in a Green Supply Chain," Sustainability, MDPI, vol. 12(4), pages 1-25, February.
    21. Angelika Endres-Fröhlich & Burkhard Hehenkamp & Joachim Heinzel, 2022. "The Impact of Product Differentiation on Retail Bundling in a Vertical Market," Working Papers Dissertations 91, Paderborn University, Faculty of Business Administration and Economics.
    22. Ilona Bondos & Marcin Lipowski, 2016. "Service Packages – Attractiveness Has Many Faces," Eurasian Journal of Business and Management, Eurasian Publications, vol. 4(1), pages 1-10.
    23. Joachim Heinzel, 2019. "Bundling in a Distribution Channel with Retail Competition," Working Papers CIE 120, Paderborn University, CIE Center for International Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Qianbo Yin & Kwei‐Long Huang & Chia‐Wei Kuo & Sean X. Zhou, 2021. "Add‐On Pricing in a Distribution Channel," Production and Operations Management, Production and Operations Management Society, vol. 30(11), pages 4069-4088, November.
    2. Girju, Marina & Prasad, Ashutosh & Ratchford, Brian T., 2013. "Pure Components versus Pure Bundling in a Marketing Channel," Journal of Retailing, Elsevier, vol. 89(4), pages 423-437.
    3. Upender Subramanian & Jagmohan S. Raju & Z. John Zhang, 2013. "Exclusive Handset Arrangements in the Wireless Industry: A Competitive Analysis," Marketing Science, INFORMS, vol. 32(2), pages 246-270, March.
    4. 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.
    5. Yunchuan Liu & Z. John Zhang, 2006. "Research Note—The Benefits of Personalized Pricing in a Channel," Marketing Science, INFORMS, vol. 25(1), pages 97-105, 01-02.
    6. Jidong Zhou, 2017. "Competitive Bundling," Econometrica, Econometric Society, vol. 85, pages 145-172, January.
    7. Roman Inderst & Greg Shaffer, 2019. "Managing Channel Profits When Retailers Have Profitable Outside Options," Management Science, INFORMS, vol. 65(2), pages 642-659, February.
    8. Vithala R. Rao & Gary J. Russell & Hemant Bhargava & Alan Cooke & Tim Derdenger & Hwang Kim & Nanda Kumar & Irwin Levin & Yu Ma & Nitin Mehta & John Pracejus & R. Venkatesh, 2018. "Emerging Trends in Product Bundling: Investigating Consumer Choice and Firm Behavior," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 5(1), pages 107-120, March.
    9. Tang, Yuanzhao & Perera, Sandun C. & Cao, Qingning & Ji, Xiang, 2023. "Supplier versus platform bundling: Optimal strategies under agency selling," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 179(C).
    10. Chakravarty, A. & Mild, A. & Taudes, A., 2013. "Bundling decisions in supply chains," European Journal of Operational Research, Elsevier, vol. 231(3), pages 617-630.
    11. Zhou, Shu & Song, Boqian & Gavirneni, Srinagesh, 2020. "Bundling decisions in a two-product duopoly – Lead or follow?," European Journal of Operational Research, Elsevier, vol. 284(3), pages 980-989.
    12. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 34, pages 2221-2299, Elsevier.
    13. Yunchuan Liu & Tony Haitao Cui, 2010. "The Length of Product Line in Distribution Channels," Marketing Science, INFORMS, vol. 29(3), pages 474-482, 05-06.
    14. Jin, Yannan & Wu, Xiaole & Hu, Qiying, 2017. "Interaction between channel strategy and store brand decisions," European Journal of Operational Research, Elsevier, vol. 256(3), pages 911-923.
    15. Noah Lim & Teck-Hua Ho, 2007. "Designing Price Contracts for Boundedly Rational Customers: Does the Number of Blocks Matter?," Marketing Science, INFORMS, vol. 26(3), pages 312-326, 05-06.
    16. Jeffrey D. Shulman & Xianjun Geng, 2013. "Add-on Pricing by Asymmetric Firms," Management Science, INFORMS, vol. 59(4), pages 899-917, April.
    17. Yunchuan Liu & Rajeev K. Tyagi, 2011. "The Benefits of Competitive Upward Channel Decentralization," Management Science, INFORMS, vol. 57(4), pages 741-751, April.
    18. Ashutosh Prasad & R. Venkatesh & Vijay Mahajan, 2017. "Temporal product bundling with myopic and strategic consumers: Manifestations and relative effectiveness," Quantitative Marketing and Economics (QME), Springer, vol. 15(4), pages 341-368, December.
    19. Hemant K. Bhargava, 2012. "Retailer-Driven Product Bundling in a Distribution Channel," Marketing Science, INFORMS, vol. 31(6), pages 1014-1021, November.
    20. Meyer, Jeffrey & Shankar, Venkatesh, 2016. "Pricing Strategies for Hybrid Bundles: Analytical Model and Insights," Journal of Retailing, Elsevier, vol. 92(2), pages 133-146.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jouret:v:91:y:2015:i:1:p:50-67. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/journal-of-retailing .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.