MULTI-CATEGORY DESIGN OF BUNDLED PRODUCTS FOR RETAIL CHANNELS CONSIDERING DEMAND UNCERTAINTY AND COMPETITION

Modem retailers now control in excess of 70% of many markets and thereby control the access manufacturers have to the end customer. Success of a new product design therefore depends upon acceptance of the product by the powerful retailer as well as the end customer. One prevalent approach to increasing both retailer and manufacturer revenues is to improve the attractiveness of a product offering by bundling related items together for one price. To be most effective, bundled products should be developed with an integrated design approach that seeks to achieve utility for the end customer as well as cost efficiencies through measures such as using common parts. We propose a bundled product design approach that endogenizes the profit maximizing prices set by the channel controlling (monopolist) retailer. The approach accounts for demand dependencies between the product categories and thus the impact of the bundle and cross-category competition on proposed engineering designs is known. Additionally, the approach simultaneously considers uncertainty in engineering design, competing manufacturer product attributes and customer preferences to ensure acceptable product profitability and market share under interval uncertainty. A bundled product design case study is presented for two complimentary power tools. Manufacturer profit and market share are optimized both deterministically and under uncertainty. We find that considering demand dependencies can create optimal bundle and individual product designs that increase profits for both retailer and manufacturer.