Retailer-driven bundling when valuation discount exists

Empirical evidence has proven that a bundle discount negatively influences the consumer’s perceived valuation of a discounted component. This paper examines how valuation discount affects decision optimisation in a distribution channel where one component from the upstream manufacturer is packaged by the downstream retailer in a bundle with the retailer’s private label product. We find that valuation discount plays a critical role in the retailer’s bundling decision. Specifically, when the valuation discount is negligible and consumers have weak valuation differentiation for the private label product, the retailer will benefit from the mixed bundling strategy. In contrast, when the valuation discount is at a high level and consumers have strong valuation differentiation for the private label product, the pure components strategy outperforms the mixed bundling strategy. Moreover, the mixed bundling strategy can help increase the manufacturer’s profit if the valuation discount is low and the low-type consumers’ valuation of the private label product is high. Otherwise, the mixed bundling strategy leads to a profit reduction.