Retailer-driven bundling when valuation discount exists

Abstract

Empirical evidence has proven that a bundle discount negatively influences the consumer’s perceived valuation of a discounted component. This paper examines how valuation discount affects decision optimisation in a distribution channel where one component from the upstream manufacturer is packaged by the downstream retailer in a bundle with the retailer’s private label product. We find that valuation discount plays a critical role in the retailer’s bundling decision. Specifically, when the valuation discount is negligible and consumers have weak valuation differentiation for the private label product, the retailer will benefit from the mixed bundling strategy. In contrast, when the valuation discount is at a high level and consumers have strong valuation differentiation for the private label product, the pure components strategy outperforms the mixed bundling strategy. Moreover, the mixed bundling strategy can help increase the manufacturer’s profit if the valuation discount is low and the low-type consumers’ valuation of the private label product is high. Otherwise, the mixed bundling strategy leads to a profit reduction.

Keywords:

• Distribution channel
• production bundling
• retailer-driven bundling
• operations–marketing interface
• valuation discount

Acknowledgements

The authors would like to thank the anonymous referees and the editors for their constructive suggestions which significantly improve the quality of the paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by the Foundation of the National Natural Science Foundation of China [grant number 71871207], [grant number 71631006]; and the Fundamental Research Funds for the Central Universities.