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The Limits of Bundling: High Demand with Low Inventories

Abstract

There is an increased interest in bundle selling mechanisms especially with the rise of subscription services. This rise was mainly fueled by the success of subscription services in the digital markets where inventory is unlimited. However, recently there is a slew of subscriptions services that emerged in the retail industry where inventory is limited. In this paper, we take a rst step towards understanding the impact of key operational metrics such as inventory levels and limited selling horizons on the optimal bundle selling strategy. We study a dynamic bundle pricing problem when the rm is selling multiple items but with limited inventory. We propose a new scaling regime to study this problem, called high-demand regime, where we scale the arrival rate in order to capture markets where demand is high but inventory is limited. Our results highlight a fundamental limitation of bundling in such markets. In particular, rms should avoid bundling fast moving items together and should rather sell them separately (or bundle fast moving items with slow moving items). Moreover, depending on the tail of the valuation distribution, the rm should either consider static pricing of the items or dynamic pricing. We provide closed form solutions for the static and dynamic pricing policies.

Type

Working Paper

Author(s)

Tarek Abdallah, Josh Reed, Arash Asadpour

Date Published

2020

Citations

Abdallah, Tarek, Josh Reed, and Arash Asadpour. 2020. The Limits of Bundling: High Demand with Low Inventories.

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