Bundling and pricing strategies for integrating physical and online stores: A game-theoretic approach considering effect of network externalities

The rapid advancement of the Internet has significantly reshaped traditional business models, enabling firms to leverage both online and offline channels to enhance competitiveness and profitability. This study explores the interplay between bundling and pricing strategies within a dual-channel retail system that integrates a physical store and an online shop, utilizing a game-theoretic approach while accounting for network externalities. A two-stage model is proposed: in stage 1, a manufacturer supplies two products with differing network externalities to a retailer, who must decide whether to sell them individually or as a bundle. In stage 2, the manufacturer considers launching its online channel to complement the existing physical channel. Four distinct scenarios are analyzed, examining the bundling and pricing strategies employed by both the manufacturer and the retailer across both channels to maximize their profits. The findings indicate that the integration of physical and online channels is mutually beneficial for both parties, resulting in increased profits that grow alongside stronger network externalities. Moreover, the optimal bundling strategy is contingent upon the nature of the products and their respective externalities. Specifically, when both products demonstrate high network externalities, the manufacturer should implement a mixed strategy—offering the products as a bundle online while selling them individually in physical stores. Numerical analysis emphasizes the importance of network externalities in shaping bundling decisions and profit outcomes, providing actionable insights for firms operating in multi-channel retail environments.