Bundling Decisions in a Two-Product Duopoly - Lead or Follow?

Shu Zhou, Boqian Song, Srinagesh Gavirneni. 2020. Bundling Decisions in a Two-Product Duopoly - Lead or Follow? European Journal of Operational Research, 284(3), 980-989.

33 Pages Posted: 7 Feb 2014 Last revised: 22 Jun 2020

See all articles by Zhou Shu

Zhou Shu

San Jose State University - Donald and Sally Lucas Graduate School of Business

Boqian Song

Southwestern University of Finance and Economics (SWUFE) - Statistical School and Center of Statistical Research

Srinagesh Gavirneni

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: May 15, 2019

Abstract

We evaluate the impact of bundling on firms' product and pricing strategies by developing and solving a multi-stage game theoretic model to represent strategic interactions between two competing firms. Each firm is able to produce two homogeneous products and can opt to bundle them together, which may have the dual benefits of providing added value to consumers and reducing marginal costs for manufacturers. One firm (the leader) determines the products offered to sell before the other (the follower), and both then simultaneously set the prices for their products. We demonstrate the existence and uniqueness of the Nash equilibrium for this game, and show that the option to bundle can benefit all competitors simultaneously. When mixed bundling is not an option, we characterize and quantify the leader's advantage in terms of profitability. However, when mixed bundling is an option, the follower may reverse his or her disadvantage in profit by using it as a potential threat. Furthermore, we perform an extensive numerical study to examine the impact of value addition and cost reduction brought by bundling on firms' equilibrium product and pricing strategies and the resulting profits.

Keywords: pricing, bundling, game theory, duopoly competition

Suggested Citation

Shu, Zhou and Song, Boqian and Gavirneni, Srinagesh, Bundling Decisions in a Two-Product Duopoly - Lead or Follow? (May 15, 2019). Shu Zhou, Boqian Song, Srinagesh Gavirneni. 2020. Bundling Decisions in a Two-Product Duopoly - Lead or Follow? European Journal of Operational Research, 284(3), 980-989. , Available at SSRN: https://ssrn.com/abstract=2390494 or http://dx.doi.org/10.2139/ssrn.2390494

Zhou Shu

San Jose State University - Donald and Sally Lucas Graduate School of Business ( email )

One Washington Square
San Jose, CA 95192-0066
United States

Boqian Song (Contact Author)

Southwestern University of Finance and Economics (SWUFE) - Statistical School and Center of Statistical Research ( email )

Zhizhi Zone 236, 555 Liutai Avenue
Wenjiang District
Chengdu, Sichuan 611130
China

Srinagesh Gavirneni

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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