Risk Considerations in Product Bundling

While bundling literature focuses on risk neutral decision makers (retailers), in this study, we portray a new perspective by addressing risk considerations in a bundling problem. We consider a retailer who has the option of selling a bundle of two products. We use a Mean-Variance approach to include retailer’s risk through her profit variability when maximizing the expected value of profit. In this research, we also address the product selection problem, in which the retailer chooses the characteristics of the products to be bundled. We study the impact of the correlation between the reservation prices of the two products. We also consider the impact of the heterogeneity in the range of reservation prices of the two products. Among other findings, we show that optimal price made by a risk-averse decision maker cannot be larger than the one made by a risk neutral decision maker