Incorporating supplier’s learning in buying bundles

We consider the situation in which a purchaser can either buy a large quantity at the same time or sequentially in a number of smaller lots. Buying in a number of smaller lots obviously increases transaction costs. But buying in smaller lots provides the opportunity to the supplier to learn by discovering the true costs of supplying every lot. This is especially interesting for purchasers (and suppliers) operating in markets where little is known about the true costs of supply or where small margins require very accurate estimates. Using optimal learning modeling we analyze the effect of incorporating learning possibilities for suppliers into the bundling decision of the purchasing manager. We show that incorporating learning into bundles can have a significant effect on the total cost of acquisition. These results show purchasing managers the importance of an underestimated effect in bundling decisions: the learning effect.