Product bundling: Impacts of product heterogeneity and risk considerations
Bundling has been extensively studied in the literature and its benefits have been manifested through three perspectives of achieving better price discrimination, helping to save costs, and preserving the power for deterring a potential entrant. In this study, we examine two aspects of bundling which have not been studied before. We examine the impact of product heterogeneity on bundling decisions. We also address risk considerations in a bundling problem. Specifically, we consider a retailer who has the option of selling a bundle of two products (pure bundling policy), or selling the products separately (no-bundling policy). The retailer could also face a product selection problem for which we consider three scenarios of choosing two products with perfectly positively correlated, perfectly negatively correlated or independent reservation prices. We use a Mean–Variance approach to include retailer's risk through her profit variability when maximizing the expected value of profit. We characterize the conditions under which a policy or scenario performs better than the others under the influence of product heterogeneity and/or retailer's risk aversion. Among other findings, we show that optimal bundling price chosen by a risk-averse decision maker cannot be larger than the one chosen by a risk neutral decision maker.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- R. Preston McAfee & John McMillan & Michael D. Whinston, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 371-383.
- 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.
- Aaron R. Brough & Alexander Chernev, 2012. "When Opposites Detract: Categorical Reasoning and Subtractive Valuations of Product Combinations," Journal of Consumer Research, Oxford University Press, vol. 39(2), pages 399 - 414.
- Michael D. Whinston, 1989.
"Tying, Foreclosure, and Exclusion,"
NBER Working Papers
2995, National Bureau of Economic Research, Inc.
- Yannis Bakos & Erik Brynjolfsson, 1997.
"Bundling Information Goods: Pricing, Profits and Efficiency,"
Working Paper Series
199, MIT Center for Coordination Science.
- Yannis Bakos & Erik Brynjolfsson, 1999. "Bundling Information Goods: Pricing, Profits, and Efficiency," Management Science, INFORMS, vol. 45(12), pages 1613-1630, December.
- John C. Eckalbar, 2010. "Closed-Form Solutions to Bundling Problems," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(2), pages 513-544, 06.
- Schmalensee, Richard, 1982. "Commodity Bundling by Single-Product Monopolies," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 67-71, April.
- Dennis W. Carlton & Michael Waldman, 1998.
"The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries,"
NBER Working Papers
6831, National Bureau of Economic Research, Inc.
- Dennis W. Carlton & Michael Waldman, 2002. "The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 194-220, Summer.
- Dennis W. Carlton & Michael Waldman, 1998. "The Strategic Use Of Tying To Preserve And Create Market Power In Evolving Industries," University of Chicago - George G. Stigler Center for Study of Economy and State 145, Chicago - Center for Study of Economy and State.
- R. Glenn Hubbard & Atanu Saha & Jungmin Lee, 2007. "To Bundle or Not to Bundle: Firms' Choices under Pure Bundling," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 14(1), pages 59-83.
- Carbajo, Jose & de Meza, David & Seidmann, Daniel J, 1990. "A Strategic Motivation for Commodity Bundling," Journal of Industrial Economics, Wiley Blackwell, vol. 38(3), pages 283-98, March.
- Choi, Tsan-Ming & Li, Duan & Yan, Houmin, 2008. "Mean-variance analysis of a single supplier and retailer supply chain under a returns policy," European Journal of Operational Research, Elsevier, vol. 184(1), pages 356-376, January.
- Janiszewski, Chris & Cunha, Marcus, Jr, 2004. " The Influence of Price Discount Framing on the Evaluation of a Product Bundle," Journal of Consumer Research, Oxford University Press, vol. 30(4), pages 534-46, March.
- repec:rje:randje:v:37:y:2006:i:4:p:946-963 is not listed on IDEAS
- Shin-yi Wu & Lorin M. Hitt & Pei-yu Chen & G. Anandalingam, 2008. "Customized Bundle Pricing for Information Goods: A Nonlinear Mixed-Integer Programming Approach," Management Science, INFORMS, vol. 54(3), pages 608-622, March.
- Lorin M. Hitt & Pei-yu Chen, 2005. "Bundling with Customer Self-Selection: A Simple Approach to Bundling Low-Marginal-Cost Goods," Management Science, INFORMS, vol. 51(10), pages 1481-1493, October.
- Wu, Jun & Li, Jian & Wang, Shouyang & Cheng, T.C.E., 2009. "Mean-variance analysis of the newsvendor model with stockout cost," Omega, Elsevier, vol. 37(3), pages 724-730, June.
- Popkowski Leszczyc, Peter T.L. & Pracejus, John W. & Shen, Yingtao, 2008. "Why more can be less: An inference-based explanation for hyper-subadditivity in bundle valuation," Organizational Behavior and Human Decision Processes, Elsevier, vol. 105(2), pages 233-246, March.
- Peitz, Martin, 2008. "Bundling may blockade entry," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 41-58, January.
- William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 90(3), pages 475-498.
- Jay Pil Choi & Christodoulos Stefanadis, 2006. "Bundling, Entry Deterrence, and Specialist Innovators," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2575-2594, September.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- 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.
- Choi, Tsan-Ming & Li, Duan & Yan, Houmin & Chiu, Chun-Hung, 2008. "Channel coordination in supply chains with agents having mean-variance objectives," Omega, Elsevier, vol. 36(4), pages 565-576, August.
- Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," The Journal of Business, University of Chicago Press, vol. 57(1), pages S211-30, January.
- Bulut, Zümbül & Gürler, Ülkü & Sen, Alper, 2009. "Bundle pricing of inventories with stochastic demand," European Journal of Operational Research, Elsevier, vol. 197(3), pages 897-911, September.
- Choi, Jay Pil, 2003. "Bundling new products with old to signal quality, with application to the sequencing of new products," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1179-1200, October.
- Xianjun Geng & Maxwell B. Stinchcombe & Andrew B. Whinston, 2005. "Bundling Information Goods of Decreasing Value," Management Science, INFORMS, vol. 51(4), pages 662-667, April.
When requesting a correction, please mention this item's handle: RePEc:eee:proeco:v:144:y:2013:i:1:p:209-222. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.