Bundling and pricing decisions for bricks-and-clicks firms with consideration of network externality

The development of the Internet has dramatically changed firms' business models. Companies can now use both virtual and physical channels to enhance their competitiveness and profitability. In addition, bundling is a commonly used promotion strategy, although managers should consider the characteristics of the candidate bundled products. This study proposes a two-stage game theoretic model, in which a manufacturer may start an online channel along with an existing physical one which is operated by a dealer, i.e., a bricks-and-clicks approach, to examine the bundling and pricing strategy when selling two products with different network externalities. In the first stage, the manufacturer offers the products to the dealer, who may sell the two products individually or in a bundle to customers. In the second stage, and with the aim of expanding market share, the manufacturer may consider starting an online channel to integrate with the existing physical channel. We consider four cases, in which the manufacturer and dealer may sell the two products either individually or bundled in the two channels, in order to obtain the corresponding optimal pricing strategies with the aim of maximizing their profits. We also perform a numerical analysis to investigate the effects that network externality has on the bundling strategies and profits of the two channels. The results indicate that the bricks-and-clicks business model benefits both the manufacturer and dealer, and their profits would increase as network externality increases. In particular, when the network externalities of the two products are both high, a mixed strategy, which sells the two products in a bundle in the online channel and individually in the physical channel, should be adopted.