On pricing and bundling decisions for Stackelberg games in parallel channels of substitutable composites

The paper describes competition within a supply network with parallel distribution channels. Each supply chain in the network is composed of a manufacturer and a retailer. Manufacturers sell two complementary products to the retailers, who then deliver to the end consumers. All players can bundle or not bundle their products assuming that the retail market presents the products in a mixed bundling setting. The motivation of this study is to mainly analyze the impact of cost reduction via manufacturers, on how the whole supply network will behave. We have modeled and solved partly and fully sequential game structures well known as Bertrand and Stackelberg games, where the preceding movers are considered to have more market power. Mathematical and numerical analyses reveal interesting propositions and managerial insights for decision makers who are practicing cost cutting strategies. The combination of different ordinal structures have led to exact mathematical comparisons among 24 games. Results indicate both manufacturers and retailers are better off with simultaneous pricing games which promotes the concept of coordination through layer and channels of the network. Cost reduction with compensation increases payoffs, if only applied by the manufacturer whose complementary products’ manufacturing costs are more distanced. It is also shown that retailers enjoy a retail advantage on one product at its best when playing retailer leading Stackelberg games.

Pricing Strategies of Unbundling and Mixed-Bundling in a Two-Sided Market Under Stochastic Demand

We investigate the pricing strategies of unbundling and mixed-bundling for a firm that produces both a product and a compatible integrated content, respectively. The firm can be viewed as a two-sided transaction platform between sellers and customers, and decides whether to sell the product and the integrated content separately or jointly. Sellers develop independent content and are charged a per-unit royalty rate for each transaction on the platform, and customers are required to pay the prices for the product and the contents. With the consideration of stochastic demand, we study the impacts of cross-side network effect on the pricing strategies of unbundling and mixed-bundling, respectively. Moreover, we compare the impact of unbundling and mixed-bundling on the pricing strategy of the platform. Compared with no cross-side network effect, we show that the firm (with unbundling and mixed-bundling) need not subsidize customers and sellers in the presence of the effect under certain conditions, indicating that it can extract the most surplus from both sides to maximize the profit. This stands in sharp contrast to the finding of the literature on two-sided markets that the platform should subsidize one side of the market in order to make profit from the other side. Moreover, our result suggests that mixed-bundling can help the firm make more profit with fewer products by subsidizing one side of the market compared with the unbundling.

The role of complementarity of goods in a mixed bundling strategy

This paper studies optimal pricing when a monopolist firm produces two complementary goods and may undertake a bundling strategy. To do so, a modified version of Yan and Bandyopadhyay’s (2011) framework is used, in which the efficacy of the bundling strategy depends positively on the degree of complementarity of goods. Two main results are obtained. First, mixed bundling turns out to be the optimal strategy for the firm, since it yields higher profits than pure unbundling and pure bundling. Second, sales and profits from the bundling (unbundling) strategy increase (decrease) as the products become more complementary, which entails an empirically sensible behavior.

Bundling cloud software to fight piracy: an economic analysis

Purpose The emergence of internet-enabled technology has led to the software service model in which the software firm, instead of the consumer, maintains software ownership. This model can curtail software piracy more effectively than the traditional on-premises software model. However, software firms are not abandoning traditional on-premises software but embracing both models simultaneously. In this study, the authors consider a firm’s software bundling decision in combination with its piracy deterrence strategy. The paper aims to discuss these issues. Design/methodology/approach The authors build three stylized models to analytically compare the bundling strategies under three scenarios: no piracy, piracy is present and piracy is present while the firm applies digital rights management (DRM). Findings The authors find pure bundling (PB) to be the optimal strategy due to the combination of competition and cannibalization effects in mixed bundling (MB). Simultaneously, consumers may enjoy greater surplus in PB than in MB, making PB the preferred strategy for both the firm and consumers. Interestingly, the win-win outcome coexists with some degree of piracy in the market. Originality/value The results provide important insights for firms and policy-makers and contribute to the literature on piracy and product bundling. First, the authors show piracy could be another driver for product bundling, which has never been discussed in prior literature. Second, the authors suggest an alternative perspective; that PB may be a desirable outcome for both firms and consumers when considering piracy and DRM. More surprisingly, this desirable outcome occurs with some level of piracy in the market. The presence of piracy leads to competition and cannibalization effects in MB, which eventually results in the win-win outcome in the software market for both the firm and the consumers.

Bundling strategies for complementary products in a horizontal supply chain

Purpose This paper aims to address the following problems: What are the firms’ optimal pricing and quality policies under three scenarios (no bundling, pure bundling and mixed bundling)? In what condition will one bundling strategy dominate the others? How does the degree of complementarity affect the firms’ decision? Design/methodology/approach Using the game theory, this study first establishes three models of bundling strategies: no bundling, pure bundling and mixed bundling and then obtains the optimal prices and quality decisions. This study uses numerical analysis to explore the relationships between the prices (demands and profits) and some key parameters and to obtain some valuable management complications. Findings Some interesting and valuable management implications are established: regardless of the degree of complementarity, adopting a pure bundling or mixed bundling strategy is better than separately selling an individual product; a high degree of complementarity leads to reduced profit in the no bundling and mixed bundling scenarios, whereas the condition in the pure bundling strategy is the opposite; and when the degree of complementarity is adequately large, choosing pure bundling strategy is more profitable. Research limitations/implications On the one hand, this study does not calculate the profit sharing ratio, and hence, the equilibrium profit sharing ratio can be explored in future work. On the other hand, marketing efforts (e.g. advertising and promotion) can be included in the study. Practical implications This study derives the necessary conditions for the most effective bundling strategy that maximizes firm’s profits, and these conclusions can provide a decision reference to the bundling decisions of firms. Originality/value First, the optimal bundling strategies in a horizontal supply chain consisting of two firms is considered. Under the pure and mixed bundling strategies, the two firms sell the bundled product by building a cooperative program. Second, both the pricing policies and quality decisions of supply chain members under the different bundling strategies are studied.