Nanda Kumar is a Professor of Marketing at Naveen Jindal School of Management, The University of Texas at Dallas, USA Detailed profile can be found here.
Naveen Jindal School of Management, University of Texas, USA
October 24, 2024
Retailer’s Bundling of Competing Products: Should Manufacturers Worry?
We develop a game-theoretic model to analyze how the bundling decisions of a retailer influence upstream competition between manufacturers. We consider a setting in which the retailer can create bundles comprised of products from the same manufacturer (self-bundles) or from different manufacturers (cross-bundles). By offering cross-bundles, the retailer can steer consumers towards products that provide higher margins, which ultimately intensifies price competition between manufacturers. We find that, besides the role of steering consumers towards high-margin products, cross-bundling can also serve as a price discrimination device. When consumers’ brand-preferences across categories are positively correlated, a cross-bundle promotion allows the retailer to serve low-valuation consumers with minimum revenue-loss from high-valuation consumers. When used for this price-discrimination purpose, cross-bundling softens price competition between manufacturers. We characterize the conditions under which the possibility of the retailer to cross-bundle enhances manufacturers’ profits. We also find that the retailer’s cross-bundling ability can lead to a win-win-win situation for all parties: manufacturers, retailer, and consumers. Moreover, the retailer’s role goes beyond bundle creation. The retailer facilitates coordination between manufacturers and, under some conditions, manufacturers attain higher profits when they sell through the retailer than if they were to bypass the middlemen and sell cross-bundles directly to consumers.
Key words : retail bundling, self-bundles, cross-bundles, multi-product, consumer steering, game-theory.
