Bundling and product strategy in channel competition

• Author: Lingzhi Shao,Sijie Li
• DOI: http://doi.org/10.1111/itor.12382
• Date: 01 January 2019
• Published date: 01 January 2019

Intl. Trans. in Op. Res. 26 (2019) 248–269

DOI: 10.1111/itor.12382

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Bundling and product strategy in channel competition

Lingzhi Shao and Sijie Li

School of Economics and Management, Southeast University, Nanjing, China

E-mail: shaolingzhi2005@126.com [Shao]; sjli@seu.edu.cn [Li]

Received 14 December 2015; receivedin revised form 4 September 2016; accepted 16 November 2016

Abstract

We investigate the bundling and product strategy in a two-stage supply chain with the channel competition,

and analyze the effect of the bundling strategy on the behavior of supply chain members. In this paper,

we consider two situations of channel competitions that are from the external or internal of the supply

chain, two types of selling strategies (bundling or unbundling), and two types of product strategies (low or

high quality). We propose the game models for different competition situations with the bundling strategy

and product-quality strategy to obtain the optimal decisions for supply chain members. We find that the

bundling is the retailer’s preferred strategy in two channel competitions; the bundling strategy encourages

the competitor (i.e., the new supplier of complementary component) outside the supply chain to provide the

low-quality components, while the product strategy of the channel competitor (i.e., the existing supplier of

complementary component) in the supply chain is not affected by the bundling strategy.

Keywords:bundling; product strategy; channel competition; complementary product

1. Introduction

The bundling strategy is pervasive in many industries, for example, airfares and hotels in entertain-

ment, computers and stereos in electronics, household appliances and extended services in home.

The best-known pair of complementary firms in the world to sell their bundling products is Intel

and Microsoft, and is renamed as Wintel. Since 1980, when IBM chose both Intel and Microsoft

as the core components of the first IBM PC, Intel and Microsoft have been inseparable. There are

several reasons that the manufacturers or retailers bundle their or their partners’ products, which

include economies of scope in production, reductions in transaction cost, improvement in customer

service, and increase in market share. Moreover, in some significant settings, the bundling strategy

is common to be utilized to deal with the competition, such as the appearance of new products, new

enterprise, and new distribution channel.

In this paper,we investigate a two-stagesupply chain that consists of two complementary suppliers

and a retailer,in which the retailer sells one common component and its complementary component.

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L. Shao and S. Li / Intl. Trans. in Op. Res. 26 (2019) 248–269 249

Now, the retailer enjoys her monopoly in the market of common component, meanwhile, she

has no choice but to face the channel competition in the market of complementary component

because another new supplier of complementary component outside the supply chain or the existing

complementary component supplier in the supply chain sells the differentiated complementary

component in the direct channel. In these two competition situations, we will explore the retailer’s

bundling action to answer her competitor’s product strategy (low or high quality), and analyze the

effect of the product bundling strategy on competitive behavior and supply chain performance.

Many studies have analyzed the price and product bundling strategy, and investigated the effect

and advantages of bundling. Drumwright (1992) investigated the premise that bundling prompts

consumers to purchase more than they ordinarily would. Johnson et al. (1999) examined whether,

and to what degree, the bundling of price-related information influences consumer evaluations.

Chakravartiet al. (2002) examined the effects of the price presentations of multicomponent product

bundle on evaluations and choices as well as the underlying processing effects, and found that

different splits of the bundle price influence evaluations and choices depending on how the focal

product price is related to thatof a comparison option. Gilbride et al. (2008) utiliz ed discrete choice

data to investigate whether price framing affects choice in mixed-price bundles, and found that the

joint and integrated frame results in the highest proportion of respondents choosing the bundle

and the fewest choosing “none.” Dominique-Ferreira et al. (2016) investigated the importance

that insurance customers give to premiums, insurers, intermediary recommendations, and bundling

strategies, and studied the relationship between attributes and consumer price sensitivity.

The bundling strategy has been investigated widely in the research of marketing. One stream

considers the symmetric market structure. Reisinger (2004) studied the incentives for multiproduct

duopolists to sell their products as a bundle. Ghosh and Balachander (2007) studied competition

between a multiproduct generalist firm and two single-product specialist firms in two product

categories and investigated the bundling strategy of generalist firm. Armstrong and Vickers (2010)

established a model with heterogeneous consumers and elastic demand and found that the effect of

the bundling strategy would be affected by purchasing cost and brand name preference. Brito and

Vasconcelos (2015) studied the competitive effects of the bundling strategy offered by two pairs of

independent firms. Another stream studied the foreclosure effects of bundling in the unsymmetrical

market. Whinston (1990) presented one of the first papers that considered the leverage hypothesis

and argued that bundling can be a mechanism to leverage market power. The tying of independent

products of which the consumers’ valuations are the same can be profitable when a commitment to

tying is possible. Nalebuff (2004) extended Whinston’s (1990) work by showing that bundling is an

effective entry-deterrent strategy for a firm with large-scale power in a product market without any

control or commitment. The bundling strategy has sometimes been utilized to preserve and create

a monopoly position when there are entry costs for the dominant firm. Choi and Stefanadis (2001)

concluded that tying may make the prospects of successful entry less certain, which discourages

rivals from investing and innovating. Carlton and Waldman (2002) focused on entry costs and

network externalities, and analyzed the profitability of bundling for a dominant firm in an industry

that is undergoing rapid technological change. Peitz (2008) studied the bundling strategy of two

products to avoid entry in a differentiated product market, and proved that bundling blockades

entry when the entry costs fall within a certain range.

There are a few research aboutthe bundling strategy in operating competition, which mostly focus

on the bundling effectson R&D and product-quality competition. Choi (2004) showed that bundling

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2017 The Authors.

International Transactionsin Operational Research C

2017 International Federation of OperationalResearch Societies