Online retailer bundling strategy in a dual-channel supply chain

Abstract

Bundling is typically used by online retailers and is receiving increasing attention. We investigate bundling in a dual-channel supply chain whose members use an agency selling contract, where a manufacturer distributes its product with a constant price in the dual-channel and pays a commission fee for each product sold through the online retailer's channel. The online retailer can sell the product separately or, if the contract allows, package it as a bundle and decide the price of the bundle. A Stackelberg game model is developed to obtain insights for optimizing bundling decisions. First, we find that the manufacturer and online retailer cannot always benefit simultaneously from bundling. Bundling could often benefit the retailer but hurt the manufacturer because bundling transfers consumer demand from the manufacturer's channel to the retailer's channel, making the manufacturer pay more in commission fees. Second, we show that bundling can achieve a win-win outcome only when the online retailer sets a low price for the bundle and the commission rate is moderate. Our findings emphasize that the commission rate significantly impacts the optimality of bundling, and neither a low nor a high commission rate can make the two sides agree about adopting bundling.