Pricing and Allocation Problem of Bundle Products with Nested Demand Structure

This study examines product bundling and proposes an effective revenue management approach under nested demand structure in which a customer can purchase a sub-service product only by buying the main service product. Two different problems are identified, a pricing problem and an allocation problem. In the pricing problem, the price of the bundled product is determined to maximize total expected revenue. It is shown that expected revenue can be increased by offering a bundle of products even if the price of the bundled product is equal to the sum of the prices of the main service product and the sub-service product. In the allocation problem, the prices of the products are specified, and the task is to decide the number of bundled products to be sold so as to maximize total expected revenue. It is shown that the relationship between the demand for the main service product and the demand for a bundled product is independent on the optimal number of bundled products. The relationship between the problems is demonstrated in a deterministic demand case. Analytical results offer insights for industries having a nested demand structure, such as tourism and entertainment.