Manufacturer- versus retailer-initiated bundling: Implications for the supply chain

This paper studies bundling in a two-level supply chain consisting of a manufacturer and a retailer. Past literature offers deep insights into product bundling but overlooks the implications of bundling at different supply chain levels, i.e., downstream and upstream, which has been widely observed in practice. In this paper, we allow either the manufacturer or the retailer to initiate bundling. We find that production costs drive the manufacturer’s and the retailer’s bundling decisions differently. In particular, the manufacturer adopts bundling when costs are not too high or low, while the retailer executes bundling when costs are medium or moderately low. We also characterize the conditions under which bundling benefits the firms. Our analysis reveals that while the manufacturer always benefits from initiating bundling, this is not necessarily the case for the retailer. Interestingly, when costs are moderately high, the retailer benefits from manufacturer-initiated bundling but is hurt by retailer-initiated bundling. Furthermore, whether initiated by the manufacturer or the retailer, bundling can lead to higher supply chain profit, consumer surplus as well as social welfare. Our results help clarify the impact of upstream and downstream bundling decisions on supply chain dynamics.