Separate and bundling selling strategies for complementary products in a participative pricing mechanism

Abstract

This paper studies the name-your-own-price (NYOP) mechanism for complementary products in which customers participate in the pricing mechanism by submitting bids. If the bid exceeds a concealed threshold, the transaction occurs. Considering supply uncertainty, two different sale strategies, bundling and separate sales, are addressed. Under the separate sale, customers can submit a bid for each of the individual products. Under the bundling sale, products are sold as a package and customers can place a single bid on it. A game-theoretic approach is used, and with respect to the concavity of the profit function, equilibrium thresholds, optimal retailer strategy, and customers bidding behavior are obtained. Results showed that complementation degree and marginal costs are critical factors that can change dominant strategy and bidding policy. High extra valuation gained by purchasing complementary products encourages customers to submit greater bids and buy the bundle which in turn increases the firm’s profit. The high value of low-marginal cost also causes the separate sale to outperform the bundling strategy. Furthermore, NYOP acts as a price discrimination tool and facilitates segmenting the market.