Optimizing Bundling Policy of Single-Period Products: Perspectives of Producers and Retailers

Optimizing Bundling Policy of Single-Period Products: Perspectives of Producers and Retailers

Gregory Gurevich (Industrial Engineering and Management Department, Shamoon College of Engineering, Beer-Sheva, Israel), Yuval Cohen (Afeka Tel-Aviv College of Engineering, Tel-Aviv, Israel) and Baruch Keren (Industrial Engineering and Management Department, Shamoon College of Engineering, Beer-Sheva, Israel)
DOI: 10.4018/ijoris.2014100101
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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.
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2. Literature Review

The relevant literature mainly relates to the newsvendor problem, and to bundling and packaging analyses. Hence, this review is divided into three parts: bundling analysis (the next sub-section), the newsvendor problem (the second sub-section) and bundling in the context of the newsvendor problem (third sub-section). Retailers’ inventory purchase decisions when discounts are offered but without bundling is presented by Li & Feng (2010).

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