Implicit Price Bundling of Retail Products: A Multiproduct Approach to Maximizing Store Profitability

TLDR

Demand interrelationships among substitute and complementary goods in retail stores have been demonstrated and should be incorporated into pricing strategies to maximize profitability. The authors review multiple-product pricing and develop a theoretical framework for retail pricing and promotion policies based on implicit price bundling of related products. They empirically calibrate how regular and deal prices of individual brands influence sales of substitute and complementary items. They show that retailers can maximize profitability by exploiting demand interdependencies among retail products.

Abstract

The presence of demand interrelationships among substitute and complementary goods in retail stores was demonstrated by Mulhern in 1989 and was extended by Walters in 1991. Retail pricing strategies should incorporate such demand interdependencies to maximize store profitability. The authors review multiple-product pricing and develop a theoretical framework for retail pricing and promotion policies based on the implicit price bundling of related products. They empirically calibrate how the regular and deal prices of individual brands influence the sales of substitute and complementary items. More important, they demonstrate how retailers can maximize profitability by exploiting the interdependencies in demand that are present among retail products.