Pure Components versus Pure Bundling in a Marketing Channel

•Channel interactions significantly reduce the retailer's incentives for bundling.•Examining consumer segments reveals how bundling can still be optimal.•PB* is a manufacturer strategy of selling a bundle that cannot be unbundled.•The manufacturer should prefer PB* over inducing the retailer to bundle.•Surprisingly the channel and retailer benefit when the manufacturer uses PB*. This paper examines how channel interactions influence product bundling decisions by channel members. Specifically, what products or bundles should be offered, at what prices, and by which channel members, in equilibrium. To answer this, we analyze Stackelberg games between a manufacturer and retailer, with pricing and bundling as decision variables, under discrete and uniform continuous distributions of reservation prices. We find that selling pure components by both manufacturer and retailer is the equilibrium except in a narrow region of the parameter space. However, if the manufacturer can sell bundles and prevent unbundling, then such a bundling strategy is optimal in many cases. Interestingly, the channel and retailer also benefit from this strategy.