Itemized pricing in B2B bundles with diminishing reservation prices and loss averse customers

This study, based on a real problem in the industrial gas business, examines product bundling under B2B relations with two unique customer behavioral characteristics: (i) customers’ discount expectation on products increases with the magnitude of the business offered to the seller and (ii) they are loss averse and require an itemized price of each product in the bundle. To model the discount expectation, we introduce a concept in which the reservation price of each component in a bundle diminishes from its stand-alone value by a factor that is proportional to the value of the bundle. For the second characteristic, we define a utility function corresponding to gains or losses experienced on reservation prices for each product in the bundle. The two features are incorporated into the special case of a two-product bundle and mathematical models for four variants of the classical pure bundling are proposed. Results indicate that both discount expectation and loss aversion negatively impact the economies of pure bundling.