Optimal bundling and pricing decisions for complementary products in a two-layer supply chain

This article explores bundling and pricing decisions for two complementary products in a two-layer supply chain consisting of a multi-product manufacturer and a retailer. We establish four different pricing models under cases of decentralized decision, while considering different portfolio-bundling strategies of the manufacturer and the retailer. A game-theoretical method is used to characterize the corresponding equilibrium outcomes in each scenario. By further analyzing and comparing the maximum profits of all four possible scenarios, optimal bundling and pricing decisions for the manufacturer and the retailer are obtained, respectively. Model extensions and numerical examples are enriched to highlight the factors affecting optimal decision-making. Finally, valuable and interesting managerial insights are summarized. Results show that the upstream manufacturer always profits more when he sells complementary products separately. However, the optimal bundling decision of the downstream retailer is jointly determined by product complementarity (as a major factor) and the difference of product profitability (as a secondary factor). Market power cannot exert an influence on both optimal bundling decisions, but it can partly affect pricing decisions.