Ann Oper Res

DOI 10.1007/s10479-017-2632-y

GAME THEORY AND OPTIMIZATION

Bundle pricing strategies for two complementary

products with different channel powers

Raghu Nandan Giri1 · Shyamal Kumar Mondal1 ·

Manoranjan Maiti1

© Springer Science+Business Media, LLC 2017

Abstract In this paper, we consider a duopoly market where two manufacturers separately
produce and sell two complementary products through a common retailer as a leader–follower
movement. The competition has been studied in two-echelon supply chain system and all
produced products are sold by the retailer with individual product prices or with pure products’
bundling price in the non-cooperative market. The demand of each product linearly depends
on prices of these two products as per their nature. Here, model for two different cases (without
and with pure products’ bundling) are developed mathematically to maximize the profit of
each participant of the supply chain and then corresponding optimal pricing strategies are
worked out for the manufacturers and retailer. It is shown that supply chain profit for the
pure bundling is better than the profit when products are sold at individual prices. Finally,
the model is illustrated with numerical data to study the effects of models’ parameters in the
pricing strategies and some marketing decisions are explored.

Keywords Supply chain management · Complementary products · Products bundle ·

Stackelberg game · Pricing strategy

1 Introduction

During the last decade, many researchers have investigated integrated business activities of
two complementary products in duopoly market like supply chain management in which
relationship between channel members(manufacturer, distributor, supplier, retailer, buyer,

B Raghu Nandan Giri

raghunandan.giri86@gmail.com
Shyamal Kumar Mondal
shyamal_260180@yahoo.co.in
Manoranjan Maiti
mmaiti2005@yahoo.co.in
1 Department of Applied Mathematics with Oceanology and Computer Programming, Vidyasagar
University, Midnapore 721102, India

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 Ann Oper Res

etc) is either non-cooperative or cooperative. The channel members of the supply chain do
not have the same power in the duopoly market. Some times retailer or the manufacturers
have more power in the business, it depends on the items’ share in the market. In non-
cooperative market, the party who has more power plays as a leader and other party is a
follower. Also in the integrated business, manufacturers produce complementary products
like computer and operating system, shampoo and conditioner, multimedia PC and sound
system, etc to influence the consumers’ demands in the market in such a way that purchase of
one product increases the possibility to purchase other product. In many cases, small change
in the demand may result the large change in the decision. So, a manager investigates the
factors that influence the demand, because customers’ purchasing behavior may be affected
by the factors such as selling price, inventory level, seasonality, etc. Yue et al. (2006) and
Mukhopadhyay et al. (2011) considered two separate firms for game theoretic models, which
had private forecast information about the market uncertainties and offered complementary
goods. Yue et al. (2006) showed that it is beneficial to share information in a Bertrand game,
whereas Mukhopadhyay et al. (2011) demonstrated that, in a Stackelberg game, information
sharing could benefit the leader but hurt the follower as well as the total profit.
Bundling does not have consistent, universally accepted definitions but product bundling
is the integration and sale of two or more separate products at one price. Product bundling
can be categorized into pure bundling and mixed bundling. Pure bundling is a strategy in
which items are sold only as a bundle not separately but mixed bundling is a strategy in which
items are sold in the form of a bundle as well as separately. The process of bundling price
influences the consumer by providing offer of two complementary products in a bundling
price that may increase the chain profit. Estelami (1999) descriptive studies on complementary
products bundling pointed out that bundling can minimize consumer costs from 18 to 57%,
depending on the number of items bundled, the value of those items, and the level of variations.
Armstrogn and Vickers (2010) showed that bundling allows a monopolist to extract more
surplus since it reduces the variance of average valuations by the law of large numbers.
Li et al. (2013) defined a measure of consumer heterogeneity that increases with costs and
presented that pure bundling performs poorly relative to individual sales as their measure of
consumer heterogeneity increases. Gürler et al. (2009) considered the stochastic modeling
of a retail firm that sells two types of perishable products in a single period not only as
independent items but also as a bundle and showed that the retailer forms more bundles, or
charges higher prices for the bundle or both as the products become more complementary and
less substitutable. Bhargava (2012) studied the bundling problem in a distribution channel
consisting of two manufacturers and one retailer and found that conflicts in the supply chain
make bundling generally less attractive.
There are also several investigations by researchers about the sale of complementary
products with mixed bundling. Choi (2008) studied the effects of mergers in complementary
system markets where the merged firm becomes able to engage in mixed bundling, and found
that welfare declines if the merger leads to foreclosure of outsiders. Chu et al. (2011) managed
all possible products bundling and showed that pure bundling is profitable than offering
individual products prices which is approximately closed to mixed bundling. Avenali et al.
(2013) considered systems of complementary products to discuss how the bundling firm uses
mixed bundling to affect its competitors’ product quality. They found that bundling forced low
quality products and may be socially harmful if there is competition in the complementary
market, and if the rivals investment is not blockaded. Sheikhzadeh and Elahi (2013) examined
risk and product heterogeneity on bundling decisions and showed that optimal bundling price
chosen by a risk-averse decision maker cannot be larger than the one chosen by a risk neutral
decision maker.

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Ann Oper Res

Some researchers also studied the products’ bundling allowing discount. Matutes and
Regibeau (1992) and Gans and King (2006) offered bundled discount to consumers who
buy their respective products’ brands in a symmetric market structure. Sheng et al. (2007)
investigated price consumer evaluations of the discounted product in a bundle and showed
that effects interplay with complementarity of bundle components. Yan and Bandyopadhyay
(2011) investigated the bundling of complementary products and showed that firm can benefit
from the complementary bundling conditionally. Yan et al. (2014) further investigated the
strategic influence of product complementarity and advertising on the success of bundling
products and showed that when a firm sells bundled products, both the product complemen-
tarity and advertising significantly impact the performance of bundled products. Brito and
Vasconcelos (2015) investigated the competitive effects of bundled discounts offered by pairs
of independent firms in setting with vertically differentiated goods and showed that in equi-
librium, all pairs of firms producing goods of the same quality level offer bundled discounts
relative to goods without bundling.
Other literature focuses on decentralized supply chain coordination and aims to find mech-
anisms to coordinate the actions among different players to achieve the optimal decision in a
two echelon supply chain in which members have different powers in the market. Choi (1991)
model of product differentiation with two manufacturers selling to a common retailer showed
that being a price leader is beneficial when demand is linear, but detrimental when demand
is multiplicative. Tsay and Agrawal (2000) studied a distribution system for a manufacturer
and two retailers in game theory frame work. Raju and Roy (2000) developed game-theoretic
models to understand how the intensity of competition affects the value of market information.
They demonstrated that information is more beneficial in industries with fiercer competition
and has greater value for larger firms. Chen and Bell (2013) examined a one manufacturer
and one retailer supply chain system for single product in which retailer faces two forms
of customer in decentralized channel interaction. Zhao et al. (2012, 2014) formulated and
analyzed pricing strategies of substitutable products in a supply chain with one manufacturer
and two competitive retailers in crisp and fuzzy environments. Here, substitution was made
based on retail prices of the products. Huang and Ke (2017),Wei and Zhao (2016) studied the
pricing strategies of two substitutable items in horizontal and vertical competition among two
manufacturers and one retailer in fuzzy environments. Giri et al. (2016) extended the works
of Zhao et al. (2012, 2014) and Wei and Zhao (2016) by considered two substitutable and
one complementary products in two level supply chain. Mahmoodi and Eshghi (2014) inves-
tigated price competition of two levels supply chains with stochastic demand by integrated or
decentralized business method. Jiang and Hao (2014) considered information sharing of two
firms that sell two substitute products under price competition and showed that private signals
are not perfectly correlated, firms can benefit from sharing signals with each other. Maiti and
Giri (2015) studied a hybrid manufacturing and remanufacturing system with retail price
and quality dependent demands and found that the better-quality product is produced in the
decentralized chain. Zhang et al. (2015) investigated the impact of consumer environmental
awareness (CEA) on order quantities of one manufacture and one retailer supply chain with
production capacity constraint and showed that firms benefit from products customization
and consumer segmentation based on CEA in the market.
With the advent of global marketing system, in the developing countries such as India,
Srilanka, Bangladesh, etc, several retailers purchase the different complementary products
from different manufacturers and sell those to the customers either separately or as a bundle.
For example, “Advanced Photographic Laboratory” in Calcutta, West Bengal, India purchases
digital cameras from Cannon, Nikon, etc and SD (Secure Digital) cards from Samsung, HP,
Transcend, etc and sells those to the customers either separately at different prices or together

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at a bundle price for some products like Cannon and Transcend, etc. This is because Cannon
has a very good market where as Transcend does not have that market in India. This real life
marketing system motivated us to take up a model imitating the above mentioned system and
to study the retailer’s marketing policy for maximum profit taking the popularity (leadership)
of the manufacturer and retailer in the concerned locality into account. Sometimes retailers
make an agreement with the particular manufacturers and sell those products at agreed prices
(co-operative system). This process has been also considered in the formulation of model. It
may be mentioned that till now, the bundling price of two complementary products under a
single supply chain system consisting of two manufacturers and one retailer is not available
in the literatures as discussed above.
In this investigation, we consider a duopoly market where two manufacturers separately
produce and sell two complementary products through a common retailer as a leader–follower
movement. The competition has been studied in two-echelon supply chain system and all
produced products are sold by the retailer with individual product prices or with pure products’
bundling price in the non-cooperative market. The demand of each product linearly depends
on prices of these two products as per their nature i.e. the demand of each product decreases
with its own and complementary product prices. Here, models for two different cases (without
and with pure products bundling) are developed mathematically to maximize the profit of
each participant of the supply chain and then some optimal pricing strategies are worked
out for manufacturers and retailer and showed that supply chain profit for the pure products
bundling is better than the profit when products are sold at individual prices. Finally, the
model is illustrated with some numerical data to study the effects of model parameters in the
pricing strategies. Some marketing decisions are also pointed out.
The rest of the paper is organized as follows. Section 2 contains the model framework. The
problem is mathematically formulated under four decision scenarios for the cases without
and with product bundle and discussed in Sect. 3. Section 4 presents the analysis of results.
Numerical experiment and impact of parameters in the optimal pricing strategies with some
observations are presented in Sect. 5. Section 6 contains conclusions and future extension.

2 The model framework

We consider a two-echelon supply chain system where two manufacturers compete to sell
two complementary products through a common retailer in non-cooperative duopoly market.
The demands of the products generated by the consumers depend linearly on the prices of
the products. Each manufacturer produces only one product and let ith manufacturer Mi
(i = 1, 2) produces product i and sells to the common retailer, who sells to the consumers
without products bundle or with pure products bundle as given in Figs. 1 and 2 in order to
derive own’s optimal pricing strategies so that the total chain profit and individual (manufac-
turers and retailer) profits are maximum. The following notations and assumptions are used
in the model formulation:

2.1 Notations

i: (i = 1, 2) the manufacturer/ product index.

ci : Unit production cost of product i.
wi : Manufacturers’ unit selling price (decision variable) of product i without products
bundling.
pi : Retailer unit selling price (decision variable) of product i without products bundling.

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Ann Oper Res

wib : Manufacturers’ unit selling price (decision variable) of product i with products
bundling.
p3b : Retailer unit selling bundling price (decision variable).
mi : Price margin enjoyed by retailer for product i.
m: Price margin enjoyed by retailer for bundling price.
di : Customers’ demands of product-i without bundling which is function of p1 , p2 .
d3b : Customers’ demands of products with product bundling which is function of p3b .
π Mi : Profit function of ith manufacturer without bundling.
πr : Profit function of the retailer without bundling.
πc : Profit function of the whole chain without bundling.
π Mib : Profit function of ith manufacturer with bundling.
πr b : Profit function of the retailer with bundling.
πcb : Profit function of the whole chain with bundling.

2.2 Assumptions

(i) All activities are performed within a single period.

(ii) The supply chain system consists of two manufacturers and one retailer. Each manufac-
turer separately produces two complementary products and sells to a common retailer.
(iii) The demand of each product is interrelated by the attributed price. Here, it is assumed
that the demand functions depend on the retail prices of two products linearly. It is noted
that the demand functions of complementary products are decreasing with respect to its
own price and price of the competitor. Therefore, the demands of two complementary
products–product-1, product-2 have been assumed in the following form:

d1 ( p1 , p2 ) = a1 − βp1 − θβp2 (1)

and d2 ( p1 , p2 ) = a2 − θβp1 − βp2 . (2)

where ai , (i = 1, 2) are the base (market potential) consumer demands i.e. when free
from prices of the products-1, 2 respectively, β is the demand responsibility with respect
to own’s price, θ, (0 ≤ θ ≤ 1) is the degree of complementariness between two prod-
ucts. The greater value of θ indicates that the two products are highly complementary
and θ = 0 indicates the two products are independent.
(iv) The bundling price of the products is less than the total price of two products if these are
sold separately. We assume that the customers generate higher demands from a larger
bundling discount. So the demands of bundling products takes the form:

 
d3b ( p3b ) = a3 − βp3b + γ p1∗ + p2∗ − p3b (3)

where a3 is the base consumer demands for bundle products, γ , (0 ≤ γ ≤ β) bun-

dle price discount factor or sensitivity which influences the demand under bundling
discount. The greater value of γ indicates the more demands under products bundling
policy than without bundling, p1∗ , p2∗ are the optimal individual prices.
(v) In real world business, it is seen that, the inventory related costs and logistic costs have
less effects on pricing decision in supply chain management. In this sense, here profit
has been considered including only revenue and manufacturing/ purchasing costs of the
product.

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 Ann Oper Res

d1 = a1 − βp1 − θβp2
Product-1 Product-1
Manufacturer-1 - -
?
- - Customers
- Retailer -
- -
Manufacturer-2 6 Product-2
Product-2 d2 = a2 − βp2 − θβp1

Fig. 1 Supply chain without products bundle

3 Model formulation and its solution

We consider a two-echelon supply chain where two manufacturer’s compete to sell two
complementary products to a retailer in non-cooperative duopoly market. The retailer sells to
the consumers on the basis of either individual product price or bundling price. The demands
of the products linearly depend on the prices of the products at the customers level. Here, we
consider two cases: Case-A: without products bundle and Case-B: with products bundle.

3.1 Case-A: without products bundle

In this case, two manufacturers produce and sell two complementary products separately
to a retailer in non-cooperative or cooperative duopoly market. The retailer sells these two
products to the customers without products bundle i.e. two product sells separately so that
each participants in the supply chain maximize his own’s profit function and chain profit
function (cf. Fig. 1). The manufacturer’s profit functions are

π M1 (w1 , p1 , p2 ) = (w1 − c1 ) (a1 − βp1 − θβp2 ) (4)

and π M2 (w2 , p1 , p2 ) = (w2 − c2 ) (a2 − θβp1 − βp2 ) (5)

The retailer profit function is

πr (w1 , w2 , p1 , p2 ) = ( p1 − w1 ) (a1 − βp1 − θβp2 ) + ( p2 − w2 ) (a2 − θβp1 − βp2 )

(6)
and the whole chain profit function is

πc ( p1 , p2 ) = ( p1 − c1 ) (a1 − βp1 − θβp2 ) + ( p2 − c2 ) (a2 − θβp1 − βp2 ) . (7)

We derive the optimal (equilibrium) pricing strategies of two manufacturers and a retailer
without products bundle in four different decision scenarios as Centralized decision (CD),
Manufacturers-leadership Stackelberg (MS) game, Retailer-leadership Stackelberg (RS)
game and Nash game models so that each members of the chain maximize his objectives.

3.1.1 Centralized decision (CD) model

In this scenario, manufacturers and retailer jointly (cooperatively) try to maximize the supply
chain profit. But the profit function does not involve wholesale price, so it does not affect
the chain’s profit only influence the profit of the individual participant of the chain. The
corresponding problem can be formulate as

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Ann Oper Res
⎧
⎪
⎪ max( p1 , p2 ) πc ( p1 , p2 )
⎨
subject to
(8)
⎪
⎪ di > 0
⎩
pi > ci , i = 1, 2.

Theorem 1 In CD model,
(i) the profit function of the whole supply chain defined in Eq. (7) is concave.
(ii) the optimal selling prices p1∗ and p2∗ are given in Eqs. (10) and (11), provided that the
conditions a1 > β(c1 + θ c2 ), a2 > β(θ c1 + c2 ), a1 > β(1 − θ 2 )c1 + θa2 , a2 >
β(1 − θ 2 )c2 + θa1 hold.

Proof The 1st and 2nd order partial diff. of the profit function of whole supply chain given
in Eq. (7) w. r. to p1 and p2 are as follows
∂πc
= −2βp1 − 2θβp2 + a1 + βc1 + θβc2 ,
∂ p1
∂πc
= −2θβp1 − 2βp2 + a2 + θβc1 + βc2
∂ p2
∂ 2 πc ∂ 2 πc ∂ 2 πc ∂ 2 πc
= −2β, = −2θβ = , = −2β.
∂ p12 ∂ p2 ∂ p1 ∂ p1 ∂ p2 ∂ p22
 
 −2β −2θβ 
Determinate value of the Hessian matrix |H | =   = 4β 2 (1 − θ 2 ) > 0 as 0 <
−2θβ −2β 
θ < 1. Therefore, the whole chain profit function is concave. 


At extreme point, we have

− 2βp1∗ − 2θβp2∗ = − (a1 + βc1 + θβc2 )

−2θβp1∗ − 2βp2∗ = − (a2 + θβc1 + βc2 ) (9)

Solving the system of linear equations given in Eq. (9), we have

c1 a1 − θa2
p1∗ = + (10)
2 2 β (1 − θ 2 )
c2 a2 − θa1
p2∗ = + (11)
2 2 β (1 − θ 2 )
From the constraints di > 0 (i = 1, 2) with the help of Eq. (9) and from the constraints pi > ci
(i = 1, 2) with the help of Eqs. (10) and (11), we have

a1 > β(c1 + θ c2 ), a2 > β(θ c1 + c2 ), a1 > β(1 − θ 2 )c1 + θa2 , a2 > β(1 − θ 2 )c2 + θa1 .

3.1.2 Manufacturers-leadership Stackelberg (MS) game

In this scenario, manufacturers size or capacity is large compared to the retailer and they
compete in non-cooperative duopoly market. The manufacturers are the leader and retailer
is the follower of the market. Each manufacturers first announces his own wholesale price
without knowing each other’s price and retailer react rationally to the leaders’ announced
prices. Then the manufacturers (leader) take the decision on the optimal wholesale prices.
The corresponding problem can be formulated as

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 Ann Oper Res

⎧
⎪
⎪ maxwi π Mi (wi , p1∗ (w1 ), p2∗ (w2 ))
⎪
⎪
⎪
⎪ subject to
⎪
⎪
⎪
⎪ wi > ci , i = 1, 2.
⎨ ∗ ∗
⎧ p1 (w1 ), p2 (w2 ) are obtained from solving the problem
and
(12)
⎪
⎪
⎪ ⎪ max( p1 , p2 ) πr (w1 , w2 , p1 , p2 )
⎪
⎨
⎪
⎪ subject to
⎪
⎪
⎪
⎪ ⎪ d >0
⎪ ⎪
⎩ ⎩ i
pi > wi , i = 1, 2.

Theorem 2 In MS game,
(i) the retailer’s and manufacturers’ profit functions πr , π M1 and π M2 defined in Eqs. (6),
(4) and (5) are concave.
(ii) on the basis of individual announcement of manufacturers, (w1 , w2 ), the retailer fixes
the optimal selling prices ( p1∗ , p2∗ ). Thus, the optimal selling prices p1∗ and p2∗ given in
Eqs. (14) and (15), provided that the following conditions a1 > β(w1 + θ w2 ), a2 >
β(θ w1 + w2 ), a1 > β(1 − θ 2 )w1 + θa2 , a2 > β(1 − θ 2 )w2 + θa1 hold.
(iii) after knowing the retailer’s optimal prices ( p1∗ , p2∗ ), manufacturers then take the optimal
decision on wholesale prices (w1∗ , w2∗ ) and given in Eqs. (19) and (20).

Proof The profit of the retailer in the MS game is

πr (w1 , w2 , p1 , p2 ) = ( p1 − w1 )(a1 − βp1 − θβp2 ) + ( p2 − w2 )(a2 − θβp1 − βp2 ) (13)
Proceeding as CD model, retailer’s profit function in the MS game is concave and the optimal
retailer pricing strategies become
w1 a1 − θa2
p1∗ = + (14)
2 2 β (1 − θ 2 )
w2 a2 − θa1
p2∗ = + (15)
2 2 β (1 − θ 2 )
From the constraints di > 0 and pi > wi (i = 1,2) as similar as CD model, we have
a1 > β(w1 +θ w2 ), a2 > β(θ w1 +w2 ), a1 > β(1−θ 2 )w1 +θa2 , a2 > β(1−θ 2 )w2 + θa1 .
At the retailer’s optimal pricing strategies p1∗ and p2∗ , the manufacturer M1 ’s profit function
in the MS game is
π M1 (w1 , p1∗ (w1 ), p2∗ (w2 )) = (w1 − c1 )(a1 − βp1∗ − θβp2∗ ) (16)
The 1st and 2nd order partial diff. of Eq. (16) w. r. to w1 are as follows
∂π M1 θβ 1 ∂ 2 π M1
= −βw1 − w2 + (a1 + βc1 ), and = −β < 0
∂w1 2 2 ∂w12
Therefore, the manufacturer M1 ’s profit function in MS game is concave as β > 0 and at
extreme point,
θβ ∗ 1
− βw1∗ − w2 = − (a1 + βc1 ) (17)
2 2
Similarly, we can show that manufacturer M2 ’s profit expression in MS game is also concave
and at extreme point,
θβ ∗ 1
− w1 − βw2∗ = − (a2 + βc2 ) (18)
2 2

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Ann Oper Res

Solving Eqs. (17) and (18), we have

2a1 − θa2 2c1 − θ c2
w1∗ = + (19)
β (4 − θ 2 ) (4 − θ 2 )
2a2 − θa1 2c2 − θ c1
w2∗ = + (20)
β (4 − θ 2 ) (4 − θ 2 )



3.1.3 Retailer-leadership Stackelberg (RS) game

In this scenario, retailer’s size or capacity is large compared to the manufacturers and they
compete in non-cooperative duopoly market. The retailer is the leader and manufacturers are
the follower of the market. The retailer first announces his own selling price and manufacturers
react rationally to the leader’s announced price. Then the retailer (leader) takes the decision
on the optimal selling prices. The corresponding problem can be formulated as
⎧
⎪
⎪ max( p1 , p2 ) πr ( p1 , p2 , w1∗ , w2∗ )
⎪
⎪
⎪
⎪ subject to
⎪
⎪
⎪ di > 0
⎪
⎨
pi > wi∗ , i = 1, 2.
∗ ∗ (21)
⎪
⎪
⎪ ⎧ w1 ( p1 , p2 ), w2 ( p1 , p2 ) are obtained from solving the problem
and
⎪
⎪ ⎨ maxwi π Mi (w1 , w2 )
⎪
⎪
⎪
⎪ subject to
⎪
⎩ ⎩
wi > ci , i = 1, 2.

Theorem 3 In the RS game,

(i) the retailer’s and manufacturers’ profit functions πr , π M1 and π M2 defined in Eqs. (6),
(4) and (5) are concave.
(ii) the optimal manufacturers’ pricing strategies (w1∗ , w2∗ ) are given in Eqs. (23) and (24).
(iii) the retailer’s optimal price strategies ( p1∗ , p2∗ ) are given in Eqs. (26) and (27) if the
conditions a1 > β( p1∗ + θ p2∗ ), a2 > β(θ p1∗ + p2∗ ) are hold.

Proof The manufacturer M1 ’s profit function in the RS game is

π M1 (w1 , w2 ) = (w1 − c1 ){a1 − β(w1 + m 1 ) − θβ(w2 + m 2 )} (22)
where m 1 and m 2 are price margins of products-1 and -2 enjoyed by retailer.
The 1st and 2nd order partial diff. of Eq. (22) w. r. to w1 are as follows
∂π M1 ∂ 2 π M1
= a1 − β(w1 + m 1 ) − θβ(w2 + m 2 ) − β(w1 − c1 ), and = −2β < 0
∂w1 ∂w12
Therefore, the manufacturer M1 ’s profit function in RS game is concave as β > 0 and at
extreme point, optimum pricing strategy of M1 is
1
w1∗ = c1 + (a1 − βp1 − θβp2 ) (23)
β
Similarly, we can show that manufacturer M2 ’s profit function in RS game is concave as
β > 0 and optimum pricing strategies for M2 is
1
w2∗ = c2 + (a2 − θβp1 − βp2 ) (24)
β

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 Ann Oper Res

The retailer’s profit function in RS game is

   
πr ( p1 , p2 ) = p1 − w1∗ (a1 − βp1 − θβp2 ) + p2 − w2∗ (a2 − θβp1 − βp2 ) (25)
The 1st and 2nd order partial diff. of Eq. (25) w. r. to p1 and p2 are
∂πr
= −2β(θ 2 + 2) p1 − 6θβp2 + 3a1 + 2θa2 + β(c1 + θ c2 ),
∂ p1
∂ 2 πr ∂ 2 πr
= −2β(θ 2 + 2), = −6θβ
∂ p12 ∂ p2 ∂ p1
∂πr
= −6θβp1 − 2β(θ 2 + 2) p2 + 2θa1 + 3a2 + β(θ c1 + c2 ),
∂ p2
∂ 2 πr ∂ 2 πr
= −6θβ, = −2β(θ 2 + 2)
∂ p1 ∂ p2 ∂ p22
The above retailer’s profit expression in RS game is concave as
4β 2 (1 − θ 2 )(4 − θ 2 ) > 0, f or 0 < θ < 1.
At extreme point, we have
3(2 − θ 2 )a1 − θ (5 − 2θ 2 )a2 2 c 1 − θ c2
p1∗ = + (26)
2β(θ − 5θ + 4)
4 2 2 (4 − θ 2 )
3(2 − θ )a2 − θ (5 − 2θ )a1
2 2 2 c 2 − θ c1
p2∗ = + (27)
2β(θ − 5θ + 4)
4 2 2 (4 − θ 2 )
Obviously, the optimal retail pricing strategies satisfy the conditions di > 0, (i = 1, 2)
i.e. a1 > β( p1∗ + θ p2∗ ), a2 > β(θ p1∗ + p2∗ )
Also, from the Eqs. (23) and (24), the conditions wi > ci , (i = 1, 2) are evidently satisfied
as di > 0, (i = 1, 2) 


3.1.4 Nash game

In this scenario, retailer’s size or capacity is almost same as of manufacturers and they
compete in the duopoly market. The retailer and manufacturers are simultaneously tries to take
decisions of each optimal price so that each profit function is maximum. The corresponding
problem can be formulate as
⎧
⎪
⎪ max( p1 , p2 ) πr (w1 , w2 , p1 , p2 )
⎪
⎪
⎪
⎪ max wi π Mi (wi , p1 , p2 ), i = 1, 2.
⎨
subject to
(28)
⎪
⎪ di > 0
⎪
⎪
⎪
⎪ p > wi
⎩ i
wi > ci , i = 1, 2.

Theorem 4 In the Nash game,

(i) the retailer’s and manufacturers’ profit functions πr , π M1 and π M2 defined in Eqs. (6),
(4) and (5) are concave.
(ii) the optimal manufacturers’ pricing strategies (w1∗ , w2∗ ) are given in Eq. (29).
(iii) the retailer optimal prices ( p1∗ , p2∗ ) are given in Eq. (30).

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Ann Oper Res

Product-1 Products-1 & 2

Manufacturer-1 - d3b = a3 − βp3b + γ(p∗1 + p∗2 − p3b )
?
-
- -
Retailer Customers
Manufacturer-2 - 6
Product-2
Fig. 2 Supply chain with pure products bundle

Proof The optimum decisions of the two manufacturers’ and the retailer are derived for RS
game and MS games in Eqs. (23), (24), (14) and (15) respectively. For Nash-equilibrium
strategies, solving these four equations we have
3a1 − θa2 6c1 − 2θ c2 3a2 − θa1 6c2 − 2θ c1
w1∗ = + , w2∗ = + (29)
β(9 − θ 2 ) (9 − θ 2 ) β(9 − θ 2 ) (9 − θ 2 )
2(3 − θ )a1 − θ (5 − θ )a2
2 2 3c1 − θ c2
p1∗ = + ,
β(1 − θ 2 )(9 − θ 2 ) (9 − θ 2 )
2(3 − θ 2 )a2 − θ (5 − θ 2 )a1 3c2 − θ c1
p2∗ = + (30)
β(1 − θ 2 )(9 − θ 2 ) (9 − θ 2 )



3.2 Case-B: with products bundle

In this case, two manufacturers produce and sell two complementary products separately to
a retailer in non-cooperative (leader–follower) or cooperative movement. The retailer sells
these two products to the customers with products bundle i.e. two products are sold in a single
price( p3b ) (cf. Fig. 2). So the demands of the customers are higher for the larger discount
( p1∗ + p2∗ − p3b ), where p1∗ and p2∗ are the selling prices of two products if these are sold
without product bundle.
Therefore, the profit functions of two manufacturers under products bundle are

π M1b (w1b , p3b ) = (w1b − c1 ) {a3b − (β + γ ) p3b } ,

 
where a3b = a3 + γ p1∗ + p2∗ . (31)
and π M2b (w2b , p3b ) = (w2b − c2 ) {a3b − (β + γ ) p3b } (32)

The profit function of the retailer is

πr b (w1b , w2b , p3b ) = ( p3b − w1b − w2b ){a3b − (β + γ ) p3b } (33)

and the whole chain profit function is

πcb ( p3b ) = π M1b + π M2b + πr b = ( p3b − c1 − c2 ){a3b − (β + γ ) p3b } (34)

We modify the preceding scenarios by considering the above profit functions and proceeding
as similar given in preceding scenarios, have the following pricing strategies.

Theorem 5 In CD model for products bundle,

(i) the profit function of the whole supply chain πcb ( p3b ) defined in Eq. (34) is concave.
(ii) the optimal bundling price p3b∗ is given in Eq. (36).

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 Ann Oper Res

Proof After substituting p1∗ and p2∗ given in Eqs. (10) and (11) into Eq. (34), and taking
partially derivatives w. r. t. p3b , we have

∂πcb ∂ 2 πcb
= −2(β + γ ) p3b + a3b + (β + γ )(c1 + c2 ), = −2(β + γ ) (35)
∂ p3b ∂ p3b
2

Therefore, the profit function of the chain under products bundle is concave as (β +γ ) > 0.
At extreme point, the optimal bundling price p3b ∗ is

∗ c 1 + c2 a3b
p3b = + (36)
2 2(β + γ )



Theorem 6 In MS game for products bundle,

(i) the retailer’s and manufacturers’ profit functions πr b , π M1b and π M2b defined in
Eqs. (33), (31) and (32) are concave.
∗ is given in Eq. (37).
(ii) the optimal bundling price of retailer p3b
(iii) after knowing the retailer’s optimal bundling price p3b ∗ , manufacturers then take the

optimal decision on wholesale prices (w1b∗ , w ∗ ) which are given in Eqs. (39) and (40).
2b

Proof Proceeding as the Centralized decision model under products bundle, the retailers’
profit function πr b (w1b , w2b , p3b ) of MS game is concave in p3b and the optimal bundle
∗ is
price p3b
∗ w1b + w2b a3b
p3b = + (37)
2 2 (β + γ )
∗ in Eq. (31) and taking partially diff. w. r. t. w , we have
Substituting the value of p3b 1b

∂π M1b ∗ (β + γ ) ∂ 2 π M1b
= a3b − (β + γ ) p3b − (w1b − c1 ), = −(β + γ ) (38)
∂w1b 2 ∂w1b 2

Therefor, manufacturer M1 ’s profit function under products bundle is concave in w1b as

(β + γ ) > 0. Similarly, profit function of the manufacturer M2 under products bundle is
concave in w2b .
At extreme point, we have

∗ 2c1 − c2 a3b
w1b = + (39)
3 3 (β + γ )
∗ 2c2 − c1 a3b
w2b = + (40)
3 3 (β + γ )



Theorem 7 In the RS game for products bundle,

(i) the retailer’s and manufacturers’ profit functions πr b , π M1b and π M2b defined in
Eqs. (33), (31) and (32) are concave.
∗ , w ∗ ) and given in Eqs. (43)
(ii) the optimal wholesale prices of the manufacturers are (w1b 2b
and (44).
(iii) after knowing the optimal wholesale prices of the manufacturers (w1b ∗ , w ∗ ), retailers’
2b
∗
then take the optimal decision on bundling price p3b which is given in Eq. (46).

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Ann Oper Res

Proof The manufacturer M1 ’s profit function under products bundle is

π M1b (w1b , p3b ) = (w1b − c1 ){a3b − (β + γ ) p3b } (41)

Partially diff. w. r. t. w1b , we have

∂π M1b ∂ 2 π M1b
= −(β + γ )(w1b − c1 ) + a3b − (β + γ ) p3b , = −2(β + γ ) (42)
∂w1b ∂w1b 2

where p3b = w1b + w2b + m. 



Therefore, the manufacturer M1 ’s profit function under products bundle is concave as (β +

γ ) > 0. Similarly, the manufacturer M2 ’s profit function under products bundle is concave.
At extreme point, we have
∗ a3b
w1b = c1 + − p3b (43)
β +γ
∗ a3b
w2b = c2 + − p3b (44)
β +γ
Substituting the values of w1b ∗ and w ∗ from the Eqs. (43) and (44) into the Eq. (33) and
2b
taking partially diff. w. r. t. p3b , we have
∂πr b ∗ ∗ ∂ 2 πr b
= −4(β + γ ) p3b + 3a3b + (β + γ )(w1b + w2b ), = −6(β + γ ) (45)
∂ p3b ∂ p3b
2

Therefore, the retailer’s profit function under products bundle is concave and the optimal
∗ is
bundling price p3b
∗ c 1 + c2 5 a3b
p3b = + (46)
6 6 (β + γ )

Theorem 8 In the Nash game for products bundle,

(i) the retailer’s and manufacturers’ profit functions πr b , π M1b and π M2b defined in
Eqs. (33), (31) and (32) are concave.
(ii) the optimal manufacturers’ pricing strategies (w1b ∗ , w ∗ ) are given in Eqs. (50) and
2b
(51).
∗ is given in Eq. (52).
(iii) the retailer’s optimal price strategy p3b

Proof The retailer’s and manufacturers’ profit functions πr b , π M1b and π M2b given in
Eqs. (33), (31) and (32) are respectively partially diff. w. r. t. p3b , w1b and w2b and we have
∂πr b ∂ 2 πr b
= −2(β + γ ) p3b + a3b + (β + γ )(w1b + w2b ), = −2(β + γ ) (47)
∂ p3b ∂ p3b
2

∂π M1b ∂ 2 π M1b
= −(β + γ )(w1b − c1 ) + a3b − (β + γ ) p3b , = −2(β + γ ) (48)
∂w1b ∂w1b 2

∂π M2b ∂ 2 π M2b
= −(β + γ )(w2b − c2 ) + a3b − (β + γ ) p3b , = −2(β + γ ) (49)
∂w2b ∂w2b 2

The retailer’s and manufacturers’ profit functions are concave and at extreme point, the
optimum decisions of wholesale prices of two manufacturers and optimum bundling price
of the retailer are

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 Ann Oper Res

∗ 3c1 − c2 a3b
w1b = + (50)
4 4 (β + γ )
∗ 3c2 − c1 a3b
w2b = + (51)
4 4 (β + γ )
∗ c1 + c2 3 a3b
p3b = + (52)
4 4 (β + γ )



4 Analysis of results

To analyze the effects of the degree of complementarity between products, bundle price
discount factor, and profit difference between the systems without bundling and with bundling
for convenience, we assume that the base demands of the items i.e. a1 = a2 = a3 =a (say) and
unit production costs= 0 i.e. c1 = c2 = 0. This is, without loss of generality to simplify the
computation and make the result comparable. Because base demands a1 , a2 , a3 and costs
c1 , c2 are not decision variables in the present models.
The bundle price discount f = ( p1∗ + p2∗ − p3b ∗ ) of Centralized decision scenario is

a{β(1 − θ ) + γ }
f = > 0 as 0 < θ ≤ 1. (53)
2β(β + γ )(θ + 1)
We obtain,
∂f a(2β + γ )
=− <0 (54)
∂θ 2β(β + γ )(θ + 1)2
and
∂f θa
= >0 (55)
∂γ 2(β + γ )2 (θ + 1)
The chain profits difference between products without bundling and with bundling (πcb −πc )
in CD scenario is  
a 2 γ 2 − β 2 (1 − θ 2 )
πcb − πc = (56)
4 β 2 (β + γ ) (θ + 1)2
We obtain,
 
∂(πcb − πc ) a 2 γ 2 − β 2 (1 + θ )
=− (57)
∂θ 2 β 2 (β + γ ) (θ + 1)3
∂(πcb − πc ) a 2 (γ + β(1 − θ )) (γ + β(1 + θ ))
= (58)
∂γ 4 β 2 (β + γ )2 (θ + 1)2
 2 
∂(πcb − πc ) a γ − β 2 (1 − θ 2 )
= (59)
∂a 2 β 2 (β + γ ) (θ + 1)2

Proposition 1 In CD scenario,
(i) the total optimal prices of products without bundling is higher than the optimal price
with products bundling i.e. price discount is positive (from (53)).
(ii) the bundle price discount ( p1∗ + p2∗ − p3b
∗ ) decreases if the degree of complementarity

between products (θ ) increases (from (54)) and increases if the bundle price discount
factor (γ ) increases (from (55)).

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Ann Oper Res

(iii) The chain profits difference between products with bundling and without bundling
(πcb − πc ),
(a) is positive if γ 2 > β 2 (1 − θ 2 ) and equal or negative if γ 2 ≤ β 2 (1 − θ 2 ) (from (56)).
(b) decreases if γ 2 > β 2 (1 + θ ) and constant or increases if γ 2 ≤ β 2 (1 + θ ) with the
degree of complementarity between products (θ ) increases (from (57)).
(c) increases with the bundle price discount factor (γ ) (from (58)).
(d) increases if γ 2 > β 2 (1 − θ 2 ) and constant or decreases if γ 2 ≤ β 2 (1 − θ 2 ) with the
base market demand (a) increases (from (59)).
Physical interpretation of Proposition 1(iii):
(a) Let, γ 2 > β 2 (1 − θ 2 ), as degree of complementarity between products, θ is small (< 1),
then θ 2 << 1. Therefore, from above relation, γ > β. Also, individual demands of
the items (i.e. d1 , d2 ) decrease with their own prices, whereas bundling demand (d3b )
increases under bundle price discount factor (γ ). This demand also decreases due to
own price (βd3b ). As γ > β, the effect of γ on profit under bundling is more than
the effect of β. If γ < β, then the effects of γ and β are reversed. This scenario is
observed in the Table 1 of the numerical experiment in Sect. 5, where γ (=0.6) is less
than β (=0.8) and the profit under bundling πcb (=1569.5) is less than profit without
bundling πc (=1667.1).
(b) In the derivation of physical phenomenon for Proposition 1 iii(a), we ignored the effect of
θ in the demand and the profit expressions as the imposed condition was γ 2  β 2 (1−θ 2 )
where θ is small. But, it is fact that θ has an effect on the individual demands (without
bundling) which decrease due to θ , whereas there is no effect of θ on the bundling demand.
However, both profits πcb and πc are affected by θ . It is seen that for γ 2 ≤ β 2 (1 + θ ),
both πcb and πc decrease due to increase of θ , but there difference πcb − πc increase
with θ . This is evident from the following numerical results.
For γ = 0.5, β = 0.45, θ = 0.55, πcb = 3404.4, πc = 3198.0, πcb − πc = 206.36,
and for γ = 0.5, β = 0.45, θ = 0.65, πcb = 3224.8, πc = 2985.6, πcb − πc =
239.17, keeping other parameters same as in numerical experiment (Sect. 5). Similar
observations (but opposite) are observed for γ 2 > β 2 (1 + θ ).
(c) As γ is involved with the bundling demand only, with the increase of γ , this demand
increases and obiviously profit πcb increases. As πc is independent of γ , it is unaffected
by the increase of γ . Hence the difference πcb − πc increases with γ .
(d) In the expression of profit πc (without bundling), the parameter γ is absent, only β is
present, whereas in πcb (profit with bundling), both γ and β are present. In, πcb , base
demand a is involved with γ and β and as a increases, πcb increases must faster than
πc due to γ > β (i.e. γ 2 > β 2 (1 − θ 2 )) and hence the difference πcb − πc increases.
Opposite nature is observed when γ < β. In this case, πc increase much faster than πcb .
The bundle price discount f = ( p1∗ + p2∗ − p3b
∗ ) in MS game scenario is

{β(5θ + 8)(1 − θ ) + γ (2θ + 3)}a

f = > 0 as 0 < θ ≤ 1. (60)
6β(β + γ )(θ + 1)(θ + 2)
We obtain,
∂f {(6β + γ )(2θ 2 + 6θ + 5)}a
=− <0 (61)
∂θ 6β(β + γ )(θ + 1)2 (θ + 2)2
and
∂f 5a(θ 2 + θ − 1)}
= . (62)
∂γ 6(β + γ )2 (θ + 1)(θ + 2)

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 Ann Oper Res

Proposition 2 In MS game scenario,

(i) the total optimal prices of products without bundling is higher than the optimal price
with products bundling i.e. price discount is positive (from (60)).
(ii) the bundle price discount ( p1∗ + p2∗ − p3b
∗ ),

(a) decreases if the degree of complementarity between products (θ ) increases (from

(61)).
(b) increases if θ 2 + θ > 1 and constant or decreases if θ 2 + θ ≤ 1 with the bundle
price discount factor (γ ) increases (from (62)).
The bundle price discount f = ( p1∗ + p2∗ − p3b
∗ ) in RS game scenario is

{β(5θ + 8)(1 − θ ) + γ (2θ + 3)}a

f = > 0 as 0 < θ ≤ 1. (63)
6β(β + γ )(θ + 1)(θ + 2)
We obtain,
∂f {(6β + γ )(2θ 2 + 6θ + 5)}a
=− <0 (64)
∂θ 6β(β + γ )(θ + 1)2 (θ + 2)2
and
∂f 5a(θ 2 + θ − 1)}
= (65)
∂γ 6(β + γ )2 (θ + 1)(θ + 2)
Proposition 3 In RS game scenario,
(i) the total optimal prices of products without bundling is higher than the optimal price
with products bundling i.e. price discount is positive (from (63)).
(ii) The bundle price discount ( p1∗ + p2∗ − p3b
∗ ),

(a) decreases if the degree of complementarity between products (θ ) increases (from

(64)).
(b) increases if θ 2 + θ > 1 and constant or decreases if θ 2 + θ ≤ 1 with the bundle
price discount factor (γ ) increases (from (65)).
The bundle price discount f = ( p1∗ + p2∗ − p3b
∗ ) in Nash game scenario is

{β(3θ + 7)(1 − θ ) + 2γ (θ + 2)}a

f = > 0 as 0 < θ ≤ 1. (66)
4β(β + γ )(θ + 1)(θ + 3)
We obtain,
∂f {(4β + γ )(θ 2 + 4θ + 5)}a
=− (67)
∂θ 2β(β + γ )(θ + 1)2 (θ + 3)2
and
∂f 3a(θ 2 + 2θ − 1)}
= . (68)
∂γ 4(β + γ )2 (θ + 1)(θ + 3)
Proposition 4 In Nash game scenario,
(i) the total optimal prices of products without bundling is higher than the optimal price
with products bundling i.e. price discount is positive (from (66)).
(ii) the bundle price discount ( p1∗ + p2∗ − p3b
∗ ),

(a) decreases if the degree of complementarity between products (θ ) increases (from

(67)).
(b) increases if θ 2 + 2θ > 1 and constant or decreases if θ 2 + 2θ ≤ 1 with the bundle
price discount factor (γ ) increases (from (68)).

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Ann Oper Res

5 Numerical experiment

5.1 Experiment

Two manufacturers, M1 and M2 produce two products–Multimedia PC and Sound system

with production costs $5.5 and $3.7 respectively and sell to a common retailer. The retailer
sells to the end customers with and without products as a bundle at the rate of demands with
the following parametric values: a = 70, β = 0.8, γ = 0.6, and θ = 0.55 in the Eqs. (1),
(2) and (3). Ignoring transportation and inventory costs, we find the optimal wholesale prices
of the manufacturers and optimal bundle and without bundle prices of the retailer in the
cooperative or non-cooperative duopoly market.
With these input data, we solve and obtain the optimal pricing strategies under different
decision scenarios for two cases which are presented in Table 1.

5.2 Discussion

The optimal manufacturers’ wholesale price, retailer retail price and profits of two manufac-
turers, retailer, and whole chain for the above four decision scenarios (mentioned Sect. 3.1)
under products with and without bundle are tabulated in Table 1. We first compare these
quantities of two complementary products when they are not bundle. The two products’ opti-
mal wholesale prices are lowest under RS game followed by the Nash and MS games. The
two products’ optimal individual retail prices under CD case are lowest followed by the Nash
and two leadership games (MS/RS). The same scenarios repeat for the case of products with
bundle.
The manufacturers’ optimum profits in Nash game are highest followed by the MS and
RS games and the optimum retailer’s profit is highest in RS game followed by the Nash and
MS games. But whole chain profit is highest under the CD case followed by the Nash and
two leadership games. The above mentioned observations are for the unbundle products. The
same scenarios occur for the case of products with bundle except the whole chain’s profit. It is
higher under Nash game followed by the CD case and two leadership games. Two interesting
observations are that (i) the optimum whole chain profits under two leadership games (MS,
RS) are same for products with and without bundle as two products’ retail prices are same,
(ii) the profit of each participants (manufacturers, Retailer) of the supply chain for products
with bundling are same because their price margins are same ($19.3).

5.3 Sensitivity

To study the effects of price elasticity parameter (β), degree of complementary(θ ) and bundle
price discount factor (γ ) on the optimal pricing strategies and profits of MS, RS, and Nash
games scenarios are presented in the Tables 2, 3 and 4 and effects of base demand(a), price
elasticity parameter (β), degree of complementary(θ ) and bundle price discount factor (γ )
in profits difference between profits under products bundle and without bundle are presented
in Figs. 3, 4, 5 and 6. For all the studies, we consider the parametric values same as in the
experiment (Sect. 5.1).
The profits for each channel members (manufacturers, Retailer), whole chain profit, whole-
sale and retail prices for three decentralized decision scenarios under the cases of products
without and with bundling (cf. Table 2) decreases as own’s price elasticity (β) increases. This
is because of increased β, reduced market demand and hence the profits and prices of each
members of the supply chain decrease.

123
123
Table 1 Optimal pricing strategies alongwith profits under different scenarios

Scenarios- Products without bundle Products with bundle

p1∗ p2∗ w1∗ w2∗ ∗

πM ∗
πM πr∗ πc∗ ∗
p3b ∗
w1b ∗
w2b ∗
πM ∗
πM πr∗b ∗
πcb
1 2 1b 2b

CD 31.0 30.1 – – – – – 1667.1 42.7 – – – – – 1569.5

MS 46.6 46.0 36.7 35.5 390.3 404.4 256.4 1051.2 76.3 32.3 30.5 503.7 503.7 251.8 1259.2
RS 46.6 46.0 21.1 19.6 195.2 202.2 653.8 1051.2 76.3 18.9 17.1 251.8 251.8 755.5 1259.2
Nash 42.6 42.6 28.8 28.8 399.5 430.3 473.9 1303.7 67.2 24.8 23.0 523.4 523.4 523.4 1570.1
Ann Oper Res
 Table 2 Effects of β on optimal pricing strategies under MS, RS and Nash games
Ann Oper Res

β Products without bundle Products with bundle

∗ ∗ πr∗ πc∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ − π∗
p1∗ p2∗ w1∗ w2∗ πM
1
πM
2
p3b w1b w2b πM
1b
πM
2b
πr∗b πcb πcb c

MS game
0.6 61.7 61.1 48.2 46.9 546.4 560.8 357.2 1464.3 101.3 42.3 40.5 814.7 814.7 407.3 2036.7 572.4
0.7 53.1 52.5 41.6 40.4 457.1 471.4 299.6 1228.1 87.0 36.6 34.8 629.4 629.4 314.7 1573.6 345.5
0.8 46.6 46.0 36.7 35.5 390.3 404.4 256.4 1051.2 76.3 32.3 30.5 503.7 503.7 251.8 1259.2 208.0
0.9 41.6 40.9 32.9 31.7 338.5 352.4 222.9 913.8 67.9 29.0 27.2 413.7 413.7 206.9 1034.3 120.5
1.0 37.5 36.9 29.9 28.6 297.1 310.9 196.2 804.1 61.2 26.3 24.5 346.7 346.7 173.4 866.8 62.7
RS game
0.6 61.7 61.1 26.8 25.3 273.2 280.4 910.8 1464.3 101.3 23.9 22.1 407.3 407.3 1222.0 2036.7 572.4
0.7 53.1 52.5 23.6 22.0 228.6 235.7 763.8 1228.1 87.0 21.1 19.3 314.7 314.7 944.1 1573.6 345.5
0.8 46.6 46.0 21.1 19.6 195.2 202.2 653.8 1051.2 76.3 18.9 17.1 251.8 251.8 755.5 1259.2 208.0
0.9 41.6 40.9 19.2 17.7 169.2 176.2 568.4 913.8 67.9 17.2 15.4 206.9 206.9 620.6 1034.3 120.5
1.0 37.5 36.9 17.7 16.2 148.5 155.4 500.1 804.1 61.2 15.9 14.1 173.4 173.4 520.1 866.8 62.7
Nash game
0.6 56.8 56.8 38.4 38.4 564.1 594.9 631.8 1790.8 88.7 32.0 30.2 842.3 842.3 842.3 2526.7 735.9
0.7 48.7 48.7 32.9 32.9 470.0 500.9 541.6 1512.4 76.4 27.9 26.1 652.5 652.5 652.5 1957.6 445.2
0.8 42.6 42.6 28.8 28.8 399.5 430.3 473.9 1303.7 67.2 24.8 23.0 523.4 523.4 523.4 1570.1 266.4
0.9 37.9 37.9 25.6 25.6 344.6 375.5 421.2 1141.3 60.0 22.4 20.6 430.7 430.7 430.7 1292.1 150.8
1.0 34.1 34.1 23.0 23.0 300.7 331.6 379.1 1011.4 54.3 20.5 18.7 361.5 361.5 361.5 1084.6 73.2

123
123
Table 3 Effects of θ on optimal pricing strategies under MS, RS and Nash games

θ Products without bundle Products with bundle

∗ ∗ πr∗ πc∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ − π∗
p1∗ p2∗ w1∗ w2∗ πM
1
πM
2
p3b w1b w2b πM
1b
πM
2b
πr∗b πcb πcb c

MS game
0.35 52.3 51.7 39.7 38.6 468.9 488.5 354.6 1312.0 80.3 34.0 32.2 566.9 566.9 283.5 1417.3 105.3
0.45 49.3 48.7 38.2 37.0 427.0 443.9 300.3 1171.2 78.2 33.1 31.3 532.9 532.9 266.4 1332.2 161.0
0.55 46.6 46.0 36.7 35.5 390.3 404.4 256.4 1051.2 76.3 32.3 30.5 503.7 503.7 251.8 1259.2 208.0
0.65 44.2 43.6 35.4 34.1 358.1 369.4 220.5 948.0 74.6 31.6 29.8 478.3 478.3 239.2 1195.8 247.8
0.75 42.1 41.4 34.2 32.8 329.7 338.1 190.8 858.6 73.0 31.0 29.2 456.2 456.2 228.1 1140.4 281.8
RS game
0.35 52.3 51.7 22.6 21.2 234.4 244.3 833.3 1312.0 80.3 19.7 17.9 283.5 283.5 850.4 1417.3 105.3
0.45 49.3 48.7 21.8 20.4 213.5 221.9 735.8 1171.2 78.2 19.3 17.5 266.4 266.4 799.3 1332.2 161.0
0.55 46.6 46.0 21.1 19.6 195.2 202.2 653.8 1051.2 76.3 18.9 17.1 251.8 251.8 755.5 1259.2 208.0
0.65 44.2 43.6 20.5 18.9 179.1 184.7 584.2 948.0 74.6 18.6 16.8 239.2 239.2 717.5 1195.8 247.8
0.75 42.1 41.4 19.9 18.2 164.9 169.0 524.7 858.6 73.0 18.3 16.5 228.1 228.1 684.2 1140.4 281.8
Nash game
0.35 47.6 47.6 30.4 30.4 462.8 496.2 639.5 1598.5 70.4 25.9 24.1 582.7 582.7 582.7 1748.2 149.7
0.45 45.0 45.0 29.6 29.6 429.7 461.8 549.0 1440.5 68.7 25.3 23.5 550.8 550.8 550.8 1652.3 211.8
0.55 42.6 42.6 28.8 28.8 399.5 430.3 473.9 1303.7 67.2 24.8 23.0 523.4 523.4 523.4 1570.1 266.4
0.65 40.6 40.6 28.1 28.1 371.8 401.5 410.8 1184.1 65.9 24.4 22.6 499.6 499.6 499.6 1498.8 314.7
0.75 38.7 38.7 27.4 27.4 346.5 374.9 357.5 1078.9 64.7 24.0 22.2 478.8 478.8 478.8 1436.3 357.4
Ann Oper Res
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Table 4 Effects of γ on optimal bundle pricing strategies under MS, RS and Nash games

γ MS game RS game
∗
p3b ∗
w1b ∗
w2b ∗
πM ∗
πM πr∗b ∗
πcb ∗
p3b ∗
w1b ∗
w2b ∗
πM ∗
πM πr∗b ∗
πcb
1b 2b 1b 2b

0.4 75.9 32.2 30.4 426.6 426.6 213.3 1066.4 75.9 18.8 17.0 213.3 213.3 639.8 1066.4
0.5 76.1 32.3 30.5 465.1 465.1 232.6 1162.8 76.1 18.9 17.1 232.6 232.6 697.7 1162.8
0.6 76.3 32.3 30.5 503.7 503.7 251.8 1259.2 76.3 18.9 17.1 251.8 251.8 755.5 1259.2
0.7 76.4 32.4 30.6 542.3 542.3 271.1 1355.6 76.4 18.9 17.1 271.1 271.1 813.4 1355.6
0.8 76.6 32.4 30.6 580.8 580.8 290.4 1452.1 76.6 19.0 17.2 290.4 290.4 871.2 1452.1
Nash game
0.4 67.4 24.9 23.1 451.1 451.1 451.1 1353.2
0.5 67.3 24.9 23.1 487.2 487.2 487.2 1461.7
0.6 67.2 24.8 23.0 523.4 523.4 523.4 1570.1
0.7 67.1 24.8 23.0 559.5 559.5 559.5 1678.5
0.8 67.1 24.8 23.0 595.7 595.7 595.7 1787.0

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∗ − π∗
Fig. 3 a versus πcb c

∗ − π∗
Fig. 4 β versus πcb c

The profits of each channel members (manufacturers, Retailer), whole chain profit, whole-
sale and retail prices for three decentralized decision scenarios under the cases of products
without and with bundling (cf. Table 3) decreases as degree of complementary (θ ) increases.
This is because of increased θ , which reduce the market demand and hence the profits and
prices of each members of the chain decrease.
The optimal wholesale prices ( w1b ∗ , w ∗ ) and bundle retail price ( p ∗ ) (cf. Table 4)
2b 3b
increase for leadership games (MS, RS) and decrease for Nash game and the profits of the
each member of the chain increase as bundle price discount factor (γ ) increases. This is

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∗ − π∗
Fig. 5 θ versus πcb c

∗ − π∗
Fig. 6 γ versus πcb c

because the higher value of γ generates more customers demands in the market which is
dominates loss of revenue per unit due to lower retail price.
The profits difference between the whole chain profit under products with and without
bundling for leadership (MS, RS) and Nash games are positive and increase as the base
demand (a), degree of complementary (θ ), bundle price discount factor (γ ) (cf. Figs. 3, 5,
6) increase. It is also decrease as own’s price elasticity (β) increases (cf. Fig. 4). This profits
difference in Nash game scenario is more than the leadership (MS, RS) game.

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6 Conclusions and future extension

In the present investigation, we have presented pricing strategies for two complementary prod-
ucts in a supply-chain system consisting of two manufacturers and one common retailer. The
marketing strategies are outline under different leader–follower relationships with and with-
out bundling of complementary products using different game strategies. The consideration
of supply-chain system is newly introduced with the bundling of products in non-cooperative
duopoly market. Here, some managerial decisions are also derived. Sensitivity analyses
against essential system parameters are presented in both tabular and pictorial forms.
The models have been built up with deterministic parameters. The same models can
be extended to fuzzy environment with fuzzy parameters in the demand functions. Other
imprecise forms such as rough, fuzzy random, etc for the system parameters can also be
considered. Here, demands of the complementary products are constructed w. r. to their
prices only. In this formulation, advertisement cost, promotional cost, etc may be taken into
account to boost the demands.

Acknowledgements The authors greatly appreciated the editors and the anonymous referees for their valuable
comments and suggestions to improve the paper in the present form. Also, the first author is gratefully to
University Grants Commission (UGC, India) for partially financial support to continue this research work by
Innovative Research Project Grants (Ref. No. VU/Innovative/Sc/03/2015).

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