Optimizing Bundling Policy of Single-Period Products

Abstract

Combining different product types into standard discount bundles is a common strategy used by producers and wholesalers to increase overall sales profitability. While markets consist of many producers and retailers, a deal is typically made between a single producer and a single retailer. This paper deals with a producer who sells items separately, and considers setting and selling standard discount bundles. The purchased wholesale bundles are unpacked by the retailer and the items are sold to the end-users one by one. Thus, the end-user demand distribution is unchanged, but the retailer's order quantity grows with the magnitude of the discount. The paper explores the effect of bundle price and content on the profits of both the producer/wholesaler and the retailer, and derives a general objective function composed of a linear combination of these profits. Moreover, the paper establishes the conditions for bundling profitability and presents a way to optimize the profit of each party (producer, or retailer) without reducing the other party's profit. A real-world case study and sensitivity analysis demonstrate the solution's applicability. The results indicate that bundling can be a coordination tool for increasing expected profit for both the producer and the retailer.