Optimal bundling in a distribution channel in the presence of substitutability and complementarity

This paper investigates the impact of product interrelatedness (substitutability and complementarity) on decision optimisation in a distribution channel consisting of a manufacturer and a retailer. The retailer purchases the manufacturer’s product and retails it with another product as a bundle. The retailer decides the bundling strategy as a choice between full mixed bundling, partial mixed bundling, and pure bundling. Based on analytical models, we reveal how the degree of substitutability and complementarity influences the channel members’ optimal bundling decisions. Considering substitutes, the retailer benefits from partial mixed bundling only when the substitutability is sufficiently high; otherwise, full mixed bundling dominates. The partial mixed bundling strategy outperforms full mixed bundling for the manufacturer when the substitutability is relatively high, but when it is not, full mixed bundling is better. Considering complements, the retailer will choose pure bundling as its optimal bundling strategy along with increasing complementarity. Otherwise, the retailer benefits from the partial mixed bundling with decreasing complementarity. The pure bundling strategy always improves the manufacturer’s profit by expanding market demand significantly.