Dynamic and targeted bundle pricing of two independently valued products

Abstract

Bundling is when two or more products are offered as a single unit and at a price lower than the sum of the individual prices of the products. We study a multi-segment market in which a retailer aims to clear the inventory of an item by bundling it with a second product which is independently valued. We investigate the question of how dynamic and segment-specific bundle pricing impacts retailer's revenue. We develop a revenue model that integrates the dynamic and segment-specific aspects of the pricing decisions, and present a computational study to analyze their revenue impact relative to a price promotion for the individual item only. The computational results indicate that the bundle offers are most effective when the initial inventory of the item under consideration is high. The results also demonstrate that dynamic pricing is beneficial when the initial inventory of the item is low. An additional revenue improvement is observed when the price of the bundle is dynamically optimized. In the computational study, segment-specific pricing is observed to have no direct impact on revenue when prices are static: segment-specific and dynamic pricing, however, can bring about substantial revenue improvements that are an increasing function of the initial inventory level of the item. We consider the correlation in consumers' valuations of the bundled products, and show that dynamically priced and segment-specific bundle offers yield a robust revenue performance, mitigating the potentially revenue-diminishing impact of positive correlation in consumers' valuations of the products.