Online Retailer Bundling Strategy in a Dual-Channel Supply Chain

Bundling is commonly 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. Analytical models are developed to obtain insights for optimizing bundling decisions. First, we find the manufacturer and online retailer cannot always benefit simultaneously from bundling. Bundling often benefits the retailer but hurts the manufacturer, because bundling transfers consumer demand from the manufacturer's channel to the retailer's channel, making the manufacturer pay more 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. This result stresses 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