Strategic Role of Retailer Bundling in a Distribution Channel

• A retailer can use a bundling option to extract strategic upstream concessions.
• Concession extractions by a retailer do not necessarily hurt a manufacturer.
• A manufacturer's production cost is critical in driving downstream bundling decision.

We study retailer bundling in a distribution channel when the manufacturer for one bundled product can strategically set the wholesale price. We show that the retailer can use a bundling option as a strategic leverage to extract concessions from the manufacturer in form of a lower wholesale price. This finding contributes a novel rationale for retailer bundling to the bundling literature. Whenever the bundling option causes this concession-extraction effect, the retailer always benefits from the lower wholesale price. The manufacturer, nevertheless, does not necessarily suffer because bundling can lead to a higher consumer demand. We also show that the manufacturer's marginal production cost plays a critical role in driving the retailer's bundling decision, concession extraction behavior and consequently the total channel profit.

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