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Bundling products to success: The

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Ruiliang Yan

Journal of Retailing and Consumer Services

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Journal of Retailing and Consumer Services 21 (2014) 48–53

Contents lists available at ScienceDirect

Journal of Retailing and Consumer Services

journal homepage: www.elsevier.com/locate/jretconser

Bundling products to success: The influence of complementarity

and advertising
Ruiliang Yan a,n, Chris Myers a,1, John Wang b,2, Sanjoy Ghose c,3
a
Department of Marketing & Management, College of Business & Entrepreneurship, Texas A&M University, Commerce, TX 75428, USA
b
School of Business, Montclair State University, Montclair, NJ 07043, USA
c
Lubar School of Business, University of Wisconsin, Milwaukee, WI 53201, USA

art ic l e i nf o a b s t r a c t

Article history: This study investigates the strategic influence of product complementarity and advertising on the success
Received 17 April 2013 of bundling products. We use a profit maximization model to show that when a firm sells bundled
Received in revised form products, both the product complementarity and advertising significantly impact the performance of
25 June 2013
bundled products. The bundling strategy with advertising can help firm achieve higher performance than
Accepted 23 July 2013
the bundling strategy without advertising. However, the price discount to the identical products must be
Available online 17 August 2013
attractive to customers and the degree of product complementarity to the complementary products must
Keywords: be large enough, and then the bundling strategy with advertising can obtain a success in the market.
Bundling Furthermore, our results also show that when the degree of the complementarity between two products
Advertising
increases, firm should invest less on advertising to promote the bundled products. Based on our results,
Product complementarity
we propose optimal marketing strategies for firms to adopt. Firm managers can utilize our findings to
Marketing strategy
plan their bundling strategies wisely.
& 2013 Elsevier Ltd. All rights reserved.

1. Introduction actual examples about complementary product bundling exist in

Bundling sales are becoming more and more popular in the
business market, though the pricing and advertising of these
bundles remains an extremely challenging task. Firms need to
consider various issues, including segmented customer demand,
product-specific costs, and consumers' multiple options. Further-
more, bundling decisions have significant implications for busi-
ness managers and important influence on firm's marketing
strategies as nowadays integrated and unique solutions become
more common for firms' central market offering (Stremersch and
Tellis, 2002; Venkatesh and Kamakura, 2003). Finally, bundling can
also minimize consumer costs, depending on the number of items
bundled, the value of those items, and the level of the variations
(Estelami, 1999; Arora, 2008).
Because product bundling can offer economies of scale, bundle
choices and sizes are significant for both consumers and sellers.
Various product bundling strategies have been employed by different
firms (Stremersch and Tellis, 2002; Arora, 2008). For example, many
n
Corresponding author. Tel.: +1 903 886 5710; fax: +1 903 886 5702.
E-mail addresses: Ruiliang.Yan@tamuc.edu, ruiliangy@gmail.com (R. Yan),
Chris.Myers@tamuc.edu (C. Myers), j.john.wang@gmail.com (J. Wang),
sanjoy@uwm.edu (S. Ghose).
1
Tel.: +1 903 886 5700; fax: +1 903 886 5702.
2
Tel.: +1 973 655 7519.
3
Tel.: +1 414 229 4224.
the market, such as the bundle of DVD players and disks in BestBuy,
the bundle of computer hardware and software in Staples, the
bundle of Internet and Phone from Comcast, the bundle of fish pole
and reel in Wal-Mart, etc. Furthermore, there are also a large
number of examples about identical product bundles in the busi-
ness market. For example, socks sales in Kohl's, car rent, auto tires,
hotel booking, etc.
A related question is that once the decision to use the bundling
strategy to sell products is made, what a firm needs to do to ensure
that the bundling strategy is beneficial and successful. We show in
our research that in order to maximize its profit, the firm needs to
engage in an advertising campaign to promote the bundled pro-
ducts while ensuring the success of the bundling strategy (e.g.,
considering price discount, the degree of product complementarity,
etc.) and making the bundling strategy perform more efficiently.
The advertising can be defined, in our model, as seller-originated
advertising that serves to inform the market of the existence and
value of the bundled products. This advertising helps advertise the
product quality characteristics, attractive price, discount, coupon
and other promotions, in order to attract customers to buy.
Widespread actual examples have prompted various research
models (Estelami, 1999; Stremersch and Tellis, 2002; Venkatesh
and Kamakura, 2003; Arora, 2008), though none of prior models
ever addresses bundling pricing policy and advertising strategy
simultaneously for both identical and complementary products.
We therefore propose a valuable model to address the optimal

0969-6989/$ - see front matter & 2013 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.jretconser.2013.07.007
 Author's personal copy
R. Yan et al. / Journal of Retailing and Consumer Services 21 (2014) 48–53
bundling price and advertising strategies for both identical and
complementary products simultaneously. Furthermore, we also
address the impact of the degree of complementarity between the
two products on bundling pricing and advertising strategies. The
degree of complementarity and the invested advertising should
influence the advantages of bundling products and thus the
optimum bundling that allows the firm to maximize its profit.
Cournot (1938) and Stremersch and Tellis (2002) show if joint
consumption is mandatory, firms should set an optimal price
based on the value of the joint consumption. The firm's sales
therefore depend on the price of the bundle, the degree of product
complementary, and the effectiveness of the invested advertising.
Specifically, we utilize a profit maximization model to address
the following main research questions: (1) What is the optimal
bundling pricing for identical and complementary products, respec-
tively? (2) What is the optimal advertising expenditure when firm
invests advertising to promote the bundled products? (3) Is the
bundling strategy with advertising always beneficial to firm? If not,
under what conditions can firm benefit from such a strategy? (4)
How does the invested advertising change as the degree of product
complementarity changes? To answer these questions clearly, we
consider and analyze three scenarios as follows.
Scenario 1: No bundling—firm sells two products separately.
Scenario 2: Bundling with advertising—firm sells the bundled
products and invests advertising to promote the bundled
products simultaneously.
Scenario 3: Bundling without advertising—firm sells the
bundled products but does not invest advertising to promote
the bundled products.
We then compare these scenarios and derive the optimal
market strategies for the firm.
In the next section, we summarize relevant literature before we
present our model with three different scenarios. The main results
pertain to optimal policies and valuable comparisons are summar-
ized in Section 3. The results of numerical examples are presented
in Section 4. In Section 5, we end our paper with some conclusions
and managerial implications.
2. Literature review
Many prior papers studied the product bundling from the different
perspectives, such as price segmentation (Stigler, 1968), price discri-
mination (Adams and Yellen, 1976), product range restrictions (Eppen
et al., 1991), reduced classification or processing costs (Kenney and
Klein, 1983), and scope economies (Baumol et al., 1982). Furthermore,
Guiltinan (1987) provides a normative framework that integrates most
of these rationales, and McAfee et al. (1989) propose a model based on
this framework that indicates mixed bundling is the optimal strategy.
The reservation prices (i.e. willing to pay) for the various products or
services are independently distributed across the population of the
consumers, and thus, as Schmalensee (1984) observes, the mixed
bundling strategy generally yields higher profits than either pure
bundling or a pure component strategy. Hanson and Martin (1990)
propose an optimization model for calculating optimal bundle prices
by considering multiple components, variety of cost, and reservation
price. Their model solves for a wide range of bundle pricing problems,
including the assumption of the free disposal of unwanted compo-
nents, profit maximization subject to consumer self-selection, and the
provision of a sufficiently large range of products that customers may
select from the bundle. Yadav and MonroeSource (1993) examine
buyers' perceived savings in a bundle price and showed that the
perceived savings from bundling purchase have a greater impact on
buyers' perceptions of transaction value than the perceived savings
49
from individual purchase. Venkatesh and Mahajan (1993) propose a
probabilistic model that a seller can use to determine the optimal
price of a bundle with pure components, pure bundling, and mixed
bundling strategies. Their model estimates the maximum level of
profits for each category and includes time and money as indepen-
dent variables. Yadav (1994) investigates how buyers evaluate
product bundles and show that buyers would like to evaluate the
bundled products from the most important to less important and
form an overall evaluation about these bundles. Estelami (1999)
conduct an empirical study to examine the consumer savings in
complementary product bundles and show that consumer savings in
complementary bundles can range from 57% to 18%. However, the
aforementioned papers all ignored the influence of the degree of
product complementarity and the value of advertising on bundling.
Stremersch and Tellis (2002) study the strategic bundling of
products and prices and suggest various optimal bundling strategies
for firm managers to choose and adopt. Venkatesh and Kamakura
(2003) suggest an analytical model for optimal bundling strategies and
price patterns in a monopolistic environment that demonstrates the
optimal solutions for complements and substitutes. Their results show
that consumers are willing to pay more for the bundle of comple-
ments than for standalone products. Arora (2008) conducts a factorial
experimental design to study the effect of price bundling and message
framing on consumer's attitude and intention for the complementary
products. His results show that both the price bundling and framing
message have a significant impact on attitudes, and their interaction
effects have a significant impact on both attitudes and intentions.
Wappling et al. (2010) investigate the possible link between the
business orientation and product bundling strategies and to the type
of customer influence on product bundling. Their results show that
reasons for product bundling in the automobile and travel sectors are
both production (e.g., try to sell more cars) as well as customer
oriented (e.g., offer benefits to customers), the influence of bundling
strategies on consumer is strong in the travel industry but not in the
automobile and banking industries, and customers in the travel and
banking industries have direct influence in how bundles are designed
while customers in the automobile industry seem to have limited
influence in designing the bundles. However, these papers did not
address the degree of complementarity of the products and the value
of advertising utilized to promote the bundled products, while we do.
Furthermore, Yan and Bandyopadhyay (2011) investigate the bundling
of complementary products and show that firm can benefit from the
complementary bundling conditionally. However, their paper did not
address the bundling strategy for the identical products and their
paper also did not address the strategic role advertising plays on the
bundling of the complementary products, while we do.
To address the conceptual and practical need for a structured
analysis of current knowledge about product bundling strategies, we
propose a profit maximization model to derive optimal marketing
strategies for a firm that plans to employ a bundling strategy. We
investigate various scenarios and compare these scenarios to propose
optimal strategies for firms. To our knowledge, our research is the first
one to study bundling pricing policy and advertising strategy simulta-
neously for both identical and complementary products and derive the
important and valuable marketing strategies for firms to employ in the
extant literature. Furthermore, our paper also is the first one to study
how the degree of product complementarity impacts the advertising
expenditure in the product bundling literature.
3. Model framework
3.1. Scenario 1: benchmark model—no bundling
A single firm sells two products to consumers. We first introduce
this benchmark model and the pricing decision when a firm sells
 Author's personal copy
50 R. Yan et al. / Journal of Retailing and Consumer Services 21 (2014) 48–53
these two products without a bundling policy. Demand for each
product depends on its own price and the price of the other
product. The decision variables for the two products are prices, p1
andp2 . Similar to Vives (1984) and Gupta and Loulou (1998), we
assume that the demand functions are linear with regard to self-
and cross-price sensitivities, so they appear as follows:
Q 1 ¼ a p1 θp2 ð1Þ
Q 2 ¼ a p2 θp1 ð2Þ
where Q i is demand for product i(¼ 1 or 2), which depends on its
own price and the other product's price. a is the market base
(i.e., potential demand if offered free of charge).p1 is the price for
product 1 and p2 is the price for product 2. θ reflects the degree of
complementarity between the two products. When θ equals 0, two
products are identical. When θ is larger than 0, two products are
complementary. Larger θ indicates a higher degree of complemen-
tarity. We also assume 0 ≤θ ≤1, so that a product's self-price
sensitivity can be greater than or equal to its cross-price sensitivity.
We expect all parameters in this model to be positive.
We also assume the production costs for products 1 and 2 are
c1 and c2 , respectively. Thus the profit function of the firm without
a bundling policy is:
R ¼ ðp1 c1 ÞQ 1 þ ðp2 c2 ÞQ 2 ð3Þ
Note that when two products are identical, c1 ¼ c2
From the above profit function, we obtain the optimal results in
Table 1. The proof is given in Appendix A.
In the following sections, to simplify the computation and
make the results comparable, we assume c1 ¼ c2 ¼ 0 without any
loss of generality. The reason is that c1 and c2 are not decision
variables in our model, and the optimal strategies will not be
affected by them.
3.2. Scenario 2: bundling with advertising
We modify the preceding model by considering a bundling
policy, such that the firm sells the two products at a bundling
pricep3 . This bundling price p3 is lower than the total price if a
consumer buys the two products separately, or p1 þ p2 . In the
meantime, firm also invests advertising to promote the bundled
products. We assume the firm generates higher demand from a
larger bundling discount. Furthermore, as in Yan (2010), we
assume a similar effectiveness of advertising on sales. Thus the
demand for bundled products can be given as follows:
pffiffiffi
Q 3 ¼ a p3 þ λi ðp1 þ p2 p3 Þ þ k A; i ¼ 1 or 2 ð4Þ
In this equation, Q 3 is demand for bundled products and λi (1≥
λi 40, i¼1 or 2) is the bundling discount price sensitivity (λ1 is the
bundling sensitivity of identical products andλ2 is the bundling
sensitivity of complementary products), which indicates the effi-
cacy of the bundling policy in stimulating demand. We anticipate
that the greater the value of λi , the more the bundling policy
contributes to the demand. Ais the invested advertising on product
bundling. The parameter k(0 o k ≤1) measures the effect of the
invested advertising on bundling sales. The larger the value of k,
Table 1
Optimal results without bundling.
Identical bundling Complementary bundling
Price p1 aþc1 aþc1 ð1þθÞ
2þ2θ 2þ2θ
aþc2
Price p2 2þ2θ
aþc2 ð1þθÞ
2þ2θ
Profit R 2a2 2aðc1 þc2 Þþc21 þc22 2a2 2aðc1 þc2 Þð1þθÞþð1þθÞðc21 þc22 þ2c1 c2 θÞ
4þ4θ 4þ4θ
the more efficient the invested advertising in stimulating custo-
mers' purchases. Thus the profit earned by the firm with a
bundling policy and the invested advertising is
R ¼ p3 Q 3 A ð5Þ
From the above profit function, we obtain the optimal results in
Table 2. The proof is given in Appendix B.
From the results in Table 2, we observe that the bundling price
is less than the price without bundling.
Furthermore, we obtain the proposition about bundling price
and advertising expenditure from Table 2 as follows. Proof is given
in Appendix C.
Proposition 1. When a firm sells products through a bundling
pricing and advertising,
(a) the advertising expenditure decreases as the degree of product
complementarity or the bundling price sensitivity increases; and
(b) the bundling price decreases as the degree of product comple-
mentarity or the bundling price sensitivity increases.
Proposition 1 shows some important findings. (1) The advertis-
ing expenditure in the bundling products decreases with the
degree of product complementarity and the bundling price sensi-
tivity. The rationale is that when customers like the bundling deal,
they will have a good motivation to buy the bundled products.
Thus firm does not need to invest so much money on advertising
to stimulate the customer demand. Furthermore, when the
bundled products have a higher degree of complementarity,
customers have a good motivation to purchase these products
with a discount. Thus firm needs to invest less in the advertising as
the bundled products have a higher degree of complementarity.
(2) The price strategy in the bundling products decreases with the
degree of product complementarity and the bundling price sensi-
tivity. The rationale is that the lower bundling price effectively
stimulates market demand when two products are close comple-
ments, thus the firm needs to charge a lower price for bundled
products with a higher degree of complementarity. Furthermore,
when the bundling deal stimulates more customer demand, the
firm needs to charge a lower price for bundled products since
lower price can further stimulate customer demand and promote
the bundled products. Thus the important managerial implication
is that when the products have a higher degree of complementar-
ity and customers are highly sensitive to the bundling deal, firm
manager should invest a lower level advertising expenditure to
promote the bundled products and charge a lower bundling price.
The bottom line, however, is the profit, not the prices and
advertising. Therefore, it is critical to find under which marketing
structure the firm can derive more profits from bundling strategy.
By comparing the firm's profit in Table 2 with its profit in Table 1,
we can conclude if the firm's profit with bundling and advertising
is larger than its profit without bundling and advertising, then the
bundling strategy with advertising can be implemented success-
fully. Otherwise, it is not in a firm's profit to utilize bundling
strategy to sell products to customers and invest advertising to
Table 2
Optimal results with bundling and advertising.
Identical bundling Complementary bundling
Price p3 2að1þλ1 Þ
2
2að1þλ2 þθÞ
2
4ð1þλ1 Þ k ð1þθÞð4ð1þλ2 Þ k Þ
Advertising A 2
a2 k ð1þλ1 Þ2
2
a2 k ð1þλ2 þθÞ2
ð4ð1þλ1 Þ k2 Þ2 ð1þθÞ2 ð4ð1þλ2 Þ k2 Þ2
Profit R a2 ð1þλ1Þ
2
a2 ð1þλ 2 þθÞ
2
4ð1þλ1 Þ k2 ð1þθÞ2 ð4ð1þλ2 Þ k2 Þ
 Author's personal copy

R. Yan et al. / Journal of Retailing and Consumer Services 21 (2014) 48–53 51

promote the bundled products. Based on our results, we have the Proposition 3 indicates that when a firm utilizes a bundling
proposition as follows. Proofs are given in Appendix D. strategy to sell its products, firm's investment in advertising helps
improve firm performance. However, the effect of advertising on
Proposition 2. (a) To identical products, firm can benefit from a bundling sales is not unvarying and unconditional. The rationale is
bundling strategy with advertising only under the condition of that the invested advertising effectively improves the diffusion of
2
2λ2 þ k 2 40; the bundling information in the market, which leads to higher
(b) To complementary products, firm can benefit from a bundl- demand and thus larger profit to firm. However, when two
ing strategy with advertising only if θ 4 θn , where θn ¼ 1=4 products are highly complemented, customers may have to buy
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
2 4 2
these two products, no matter whether there is a bundling policy.
ð 8k k þ 16λ2 16 k Þ. As a results, the promotional effect of advertising on bundled
Proposition 2 indicates that the bundling strategy with adver- products decreases. Hence, firm manager would invest less on
tising is a valuable mechanism to be utilized to improve firm advertising to promote the bundled products, which thus leads to
performance only when some conditions are satisfied. If firm less profit difference between the bundling strategy with adver-
manager plans to uses a bundling strategy with advertising to sell tising and the bundling strategy without advertising.
its products, he should consider the bundling discount, the We also consider the important effect of the market size on the
customers' sensitivity to bundling, the effectiveness of advertising, value of a bundling strategy with advertising and obtain the
and the degree of product complementarity very carefully. The following proposition. Proof is given in Appendix G.
important managerial guideline is that when firm manager plans
Proposition 4. To the bundling strategy with advertising of identical
to engage in bundling sales with advertising promotion, he needs
and complementary products, their values always increase with the
to do a marketing research to obtain accurate information about
size of market.
customers' responses in bundling discount and purchase inten-
tions, advertising effectiveness, and product complementarity. The results in Proposition 4 are to be expected. When the
Thus he can make a right decision if the bundling strategy with market is larger, the bundling strategy and its advertising will have
advertising can be employed and under what conditions this more powerful impact on customer purchase behaviors, which
strategy can be employed. For example, when a firm utilizes a thus leads to larger influence on the firm's profit. For example, in
bundling strategy with advertising to sell identical products, firm large cities or populous areas, firm managers should actively
manager needs to set an attractive bundling discount to custo- consider utilizing bundle strategy to sell products and in the
mers. Furthermore, when a bundling strategy with advertising is meantime, invest advertising to promote bundling to improve
applied to the complementary products, firm manager should firm performance.
evaluate the product complementarity accurately. If the products
have a low degree of complementarity, bundling sales are not the
optimal strategy. Instead, separate sales for complementary pro- 4. Numerical examples
ducts are the optimal strategy to help firm achieve a higher profit.
We derived our propositions analytically, yet the analytical
expressions often are too complex to provide meaningful insights
3.3. Scenario 3: bundling without advertising for the complementary products. Therefore, we undertake some
numerical examples to illustrate the effect of the degree of
However, one question arises if the bundling strategy with complementarity between two products on firm performance.
advertising does have a higher performance than the bundling We also thereby illustrate the value of a bundling strategy with
strategy without advertising. Therefore, it is critical to determine advertising for the firm's profit. For these numerical examples, the
which strategy enables the firm to derive more profits. The values of the various parameters we use appear in Table 4.
optimal results under bundling strategy without advertising are In Fig. 1, we show that a firm's profit always decreases with the
summarized in Table 3. Proof is given in Appendix E. degree of complementarity between two products (increasing θ)
We then compare the profits earned in two scenarios: (1) when in the scenarios of no bundling, bundling without advertising, and
the firm employs a bundling strategy with advertising in Table 2 bundling with advertising. The gap between the scenario of no
and (2) when the firm employs a bundling strategy without bundling and the scenario of bundling with advertising and the
advertising in Table 3. Accordingly, we obtain Proposition 3, with gap between the scenario of bundling without advertising and the
the proof in Appendix F.
5000
Proposition 3. (a) The profit of the firm employing a bundling
strategy with advertising is greater than its profit employing a
4500
bundling strategy without advertising;
(b) To the complementary products, the profit difference (between
4000
the bundling strategy with advertising and the bundling strategy
profit

without advertising) decreases as the degree of complementarity ..... blue line is no bundling.
--- red line is bundling with advertising.
between two products increases. 3500
-------- pink line is bunding without advertising.

3000
Table 3
Optimal results with bundling but without advertising.
2500
Identical bundling Complementary bundling 0.0 0.2 0.4 0.6 0.8 1.0
q
Price p3 2a 2að1þλ2 þθÞ
4 4ð1þθÞð1þλ2 Þ Fig. 1. Firm proing without advertising, and with bundling with advertising. (For
Profit R a2 ð1þλ1 Þ a2 ð1þλ2 þθÞ2 interpretation of the references to color in this figure legend, the reader is referred
4 4ð1þθÞ2 ð1þλ2 Þ
to the web version of this article.)
 Author's personal copy

52 R. Yan et al. / Journal of Retailing and Consumer Services 21 (2014) 48–53

Table 4 as Wal-Mart, Best Buy, Babies “R” Us, and Kohl's, can apply these
Parameter values and range of values in numerical strategies to their businesses and achieve a higher profit.
examples.
Several extensions to this research are proposed. First, we have
Parameters Base and range of values assumed that firms have perfect information about the market, but
additional research should explore the optimal bundling strategies
a 100 in an incomplete information setting. Second, we can address the
θ 0–1 value of bundling strategies in a vertical structure with a supplier
k 0.6
λ 0.8
and a retailer. Third, the effect of mixed bundling with advertising
on firm performance may be an interesting research topic in the
future. Finally, we assumed a linear theoretical demand function in
scenario of bundling with advertising reflect the value of the this paper for analytical tractability. While the linear theoretical
bundling strategy with advertising. As these gaps show, when the demand models have been used extensively in economics and
degree of complementarity between two products increases marketing, future research can collect data to run regression
(increasing θ), the value of the bundling strategy with advertising models to examine whether the derived qualitative implications
decreases for the firm. Furthermore, we also show that a firm can can be generalized to empirical results.
benefit from the bundling strategy with advertising only under
certain conditions. These results confirm our analytical results for
complementary products. Acknowledgments

The authors gratefully acknowledge the Editor, Professor Harry

5. Conclusions and managerial implications Timmermans, and four anonymous reviewers for their construc-
tive comments and suggestions that were instrumental in improv-
Our study makes theoretical and substantive contributions to ing this paper.
extant literature. Specifically, we utilize a profit maximization
model to study the value of the bundling strategy with advertising
for both the identical and complementary products and demon- Appendix A
strate that optimal bundling pricing and advertising strategies
exist for a firm that plans to sell products through a bundling When there is no bundling,
strategy. We first analyze three scenarios: (1) no bundling, (2)
bundling with advertising, and (3) bundling without advertising. Q 1 ¼ a p1 θp2
Then we compare these scenarios to derive optimal strategies. Our Q 2 ¼ a p2 θp1
results show that the bundling strategy with advertising can help R ¼ ðp1 c1 ÞQ 1 þ ðp2 c2 ÞQ 2
firm achieve higher performance than the bundling strategy
without advertising. However, the price discount to the identical We differentiate R on p1 and p2 , respectively, and let ∂R=∂p1 ¼ 0
products must be attractive to customers and the degree of and ∂R=∂p2 ¼ 0. Then, we can obtain
product complementarity to the complementary products must a þ c1 ð1 þ θÞ a þ c2 ð1 þ θÞ
be large enough, and then the bundling strategy with advertising p1 ¼ ; p2 ¼
2 þ 2θ 2 þ 2θ
can obtain a success in the market. Furthermore, our results also
show that when the degree of the complementarity between two Then we have
products increases, firm should invest less on advertising to 2a2 2aðc1 þ c2 Þð1 þ θÞ þ ð1 þ θÞðc21 þ c22 þ 2c1 c2 θÞ
promote the bundled products. However, as the market demand R¼
4 þ 4θ
size increases, the bundling strategy with advertising always
becomes more valuable to a firm who expects to achieve a higher Furthermore,
profit. Our numerical examples further illustrate and confirm our a a
∂p1 =∂θ ¼ o 0 and ∂p2 =∂θ ¼ o0
analytical findings, which in turn offer key managerial insights to 2ð1 þ θÞ2 2ð1 þ θÞ2
firm managers.
Thus, the results in Table 1 are proved.
Our findings can help firms identify the values of product
categories, pricing policy, and advertising expenditure for their
bundling strategies. In addition, firms can use the findings from
our research to improve their marketing decisions and thus Appendix B
enhance their profits. As bundling becomes more and more
popular in the market, it is of increasing managerial importance When there is a bundling with advertising and c1 ¼ c2 ¼ 0,
pffiffiffi
to develop some valuable marketing strategies for firms to use in Q 3 ¼ a p3 þ λðp1 þ p2 p3 Þ þ k A
order to improve their performances. In this research, we employ a
profit-maximization model to derive some important findings to R ¼ p3 Q 3 A
firm managers, who are using or plan to use bundling strategy to
sell products to customers. If a firm can wisely apply our findings Following the same proof procedure as in Appendix A, we obtain
to its decision-making, he can improve its profit efficiently. For all the results summarized in Table 2.
example, when a firm plans to sell identical bundled products, he
needs to set an attractive price discount to customers. Otherwise, a
bundling strategy is not beneficial to this firm. However, if a firm Appendix C
plans to sell complementary bundled products, the degree of
product complementarity significantly impacts his decision if a In the bundling with advertising,
bundling strategy can be used. If a firm plans to sell highly 2
complementary products, such as computers and monitors, he 2að1 þ λ2 þ θÞ a2 k ð1 þ λ2 þ θÞ2
p3 ¼ 2
and A ¼ 2
should advertise less for these bundled products. Many firms, such ð1 þ θÞð4ð1 þ λ2 Þ k Þ ð1 þ θÞ2 ð4ð1 þ λ2 Þ k Þ2
 Author's personal copy

R. Yan et al. / Journal of Retailing and Consumer Services 21 (2014) 48–53 53

Taking the derivative of p3 on λ2 andθ, respectively, we then obtain Appendix G

2
2aðk þ 4θÞ We first compare the firm profit in Table 2 with the firm profit
∂p3 =∂λ2 ¼ 2
o0 and
ð1 þ θÞð4ð1 þ λ2 Þ k Þ2 in Table 3 for identical and complementary products, respectively,
2aλ2 and then we take the derivative of the profit difference ona,
∂p3 =∂θ ¼ 2
o0
ð1 þ θÞ2 ð4ð1 þ λ2 Þ k Þ Proposition 4 thus is proved.

By the same way, we can prove that ∂A=∂λ1 o 0 and ∂A=∂θ o 0 References
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