Search

When managing projects with considerable uncertainty, such as those arising in construction, defense, and new product development, it is customary for a manufacturer (project manager) to offer contracts under which [...]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ejor.2005.11.009 Byline: Kevin F. McCardle, Kumar Rajaram, Christopher S. Tang Keywords: Retailing; Product bundling; Pricing; Inventory management; Basic products; Fashion products Abstract: We consider the impact of bundling products on retail merchandising. We consider two broad classes of retail products: basic and fashion. For these product classes, we develop models to calculate the optimal bundle prices, order quantities, and profits under bundling. We use this analysis to establish conditions and insights under which bundling is profitable. Our analysis confirms that bundling profitability depends on individual product demands, bundling costs, and the nature of the relationship between the demands of the products to be bundled. We also provide detailed numerical examples. Author Affiliation: University of California at Los Angeles, Anderson Graduate School of Management, 110 Westwood Plaza, Box 951481, Los Angeles, CA 90095-1481, United States Article History: Received 2 August 2004; Accepted 27 November 2005 Article Note: (footnote) [star] The authors thank Professor Steven Lippman and three anonymous referees for their comments and suggestions.

A standard prediction of neoclassical microeconomics is that with perfect competition, free entry, and atomistic firms producing a homogeneous product, equilibrium finds all firms employing that technology which has minimum average cost. That competition drives out inefficient producers and reduces heterogeneity within industries is, consequently, a commonplace rule of thumb in economic thinking. This paper demonstrates that demand uncertainty is sufficient to produce heterogeneity in the equilibrium employment of production technologies and to permit the coexistence of producers exhibiting different minimum average costs. This heterogeneity is ubiquitous because the conditions for its presence are not stringent.

A firm often makes an adoption decision regarding an improvement of one technology depending on changes in other technologies. For example, a manufacturer with a serial production line considers jointly upgrading multiple machines, or a firm producing an assembled product considers improving several components simultaneously. Economies or diseconomies of scope in the fixed cost of adoption when multiple improvements are undertaken at the same time generate an economic dependence among the technological innovations. Although the literature on technological innovations has attributed slow adoption mainly to uncertainties outside the firm, this paper shows that the economic dependence that inherently defines cost relationships inside the firm can significantly influence the timing of adoption. Furthermore, this impact is not unidirectional: economic dependence can either expedite or delay the adoption of an improved technology. [ABSTRACT FROM AUTHOR]