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Bundling Strategies When Products Are Vertically Differentiated and Capacities Are Limited

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  • Mihai Banciu

    () (School of Management, Bucknell University, Lewisburg, Pennsylvania 17837)

  • Esther Gal-Or

    () (Joseph M. Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, Pennsylvania 15260)

  • Prakash Mirchandani

    () (Joseph M. Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, Pennsylvania 15260)

Abstract

We consider a seller who owns two capacity-constrained resources and markets two products (components) corresponding to these resources as well as a bundle comprising the two components. In an environment where all customers agree that one of the two components is of higher quality than the other and that the bundle is of the highest quality, we derive the seller's optimal bundling strategy. We demonstrate that the optimal solution depends on the absolute and relative availabilities of the two resources as well as upon the extent of subadditivity of the quality of the products. The possible strategies that can arise as equilibrium behavior include a pure components strategy, a partial- or full-spectrum mixed bundling strategy, and a pure bundling strategy, where the latter strategy is optimal when capacities are unconstrained. These conclusions are contrary to findings in the prior literature on bundling that demonstrated the unambiguous dominance of the full-spectrum mixed bundling strategy. Thus, our work expands the frontier of bundling to an environment with vertically differentiated components and limited resources. We also explore how the bundling strategies change as we introduce an element of horizontal differentiation wherein different types of customers value the available components differently.

Suggested Citation

  • 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.
  • Handle: RePEc:inm:ormnsc:v:56:y:2010:i:12:p:2207-2223
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    File URL: http://dx.doi.org/10.1287/mnsc.1100.1242
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    References listed on IDEAS

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    Cited by:

    1. Hemant K. Bhargava, 2012. "Retailer-Driven Product Bundling in a Distribution Channel," Marketing Science, INFORMS, vol. 31(6), pages 1014-1021, November.
    2. Banciu, M. & Ødegaard, F., 2016. "Optimal product bundling with dependent valuations: The price of independence," European Journal of Operational Research, Elsevier, vol. 255(2), pages 481-495.
    3. Ødegaard, Fredrik & Wilson, John G., 2016. "Dynamic pricing of primary products and ancillary services," European Journal of Operational Research, Elsevier, vol. 251(2), pages 586-599.
    4. Luo, Kai & Bollapragada, Ramesh & Kerbache, Laoucine, 2017. "Inventory allocation models for a two-stage, two-product, capacitated supplier and retailer problem with random demand," International Journal of Production Economics, Elsevier, vol. 187(C), pages 168-181.

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