Product bundling: Impacts of product heterogeneity and risk considerations

Bundling has been extensively studied in the literature and its benefits have been manifested through three perspectives of achieving better price discrimination, helping to save costs, and preserving the power for deterring a potential entrant. In this study, we examine two aspects of bundling which have not been studied before. We examine the impact of product heterogeneity on bundling decisions. We also address risk considerations in a bundling problem. Specifically, we consider a retailer who has the option of selling a bundle of two products (pure bundling policy), or selling the products separately (no‐bundling policy). The retailer could also face a product selection problem for which we consider three scenarios of choosing two products with perfectly positively correlated, perfectly negatively correlated or independent reservation prices. We use a Mean–Variance approach to include retailer's risk through her profit variability when maximizing the expected value of profit. We characterize the conditions under which a policy or scenario performs better than the others under the influence of product heterogeneity and/or retailer's risk aversion. Among other findings, we show that optimal bundling price chosen by a risk‐averse decision maker cannot be larger than the one chosen by a risk neutral decision maker.