Bundling or unbundling? Integrated simulation model of optimal pricing strategies

Bundling is the practice of selling goods together in a package. The extant research has recognised the role of three elements affecting the profitability of bundling strategies: (i) heterogeneity of consumer's reservation prices and their dependence structure; (ii) complementarity of the demand and (iii) economies of scale and scope in production. These major elements are well defined but have never been integrated into one model. We present an integrated simulation model and show how these three elements affect the profitability of different pricing strategies: pure components, pure bundling, and mixed bundling. This approach used recognises the complex relationships which cannot be directly inferred from a purely analytical approach. Multi-scenario analytical scheme flexibly adjusts to different real market conditions. We adopt copula functions in a simulation framework and propose a general form of cost function. We show that the effects of substitutability of the bundle components can be mitigated or even reversed by other supply and demand side factors, such as the correlation of demands or economies of scope. In consequence, studies which do not integrate all these elements can be misleading in the assessment of bundling performance.