Operational Role of Retail Bundling and Its Implications in a Supply Chain

We study the impacts of retail bundling on a supply chain with a manufacturer and a retailer. The retailer orders a primary product from the manufacturer before demand uncertainty materializes, and can retail it in a bundle with a secondary product afterwards. Our findings reveal three effects of bundling. First, bundling can help a retailer mitigate the adverse consequences of demand uncertainty in the primary product and price‐discriminate customers of the secondary product. Second, bundling can lower the retailer’s wholesale‐price elasticity and partition the retailer’s ordering decision into bundling and no‐bundling regions, between which there is a marked drop in the retailer’s optimal order quantity. Third, bundling affects the manufacturer’s wholesale price decision in an unexpected way: The manufacturer may lower the wholesale price when the retailer bundles. Our analysis shows bundling benefits the manufacturer, but can sometimes hurt the retailer. Further, when uncertainty in retail order is considered, while the manufacturer always benefits from retail bundling in expectation, it might be worse off with bundling depending on the realization of the uncertain market size. This explains why retail bundling has been a concern to some major manufacturers whereas they do not prohibit bundling up front.