Bundles of Joy: The Ubiquity and Efficiency of Bundles in New Technology Markets

Abstract

This paper examines the economic logic underlying bundles and tie-in sales and uses the lessons learned from that examination to analyze seven specific instances of bundling that have been the subject of antitrust scrutiny or other policy initiatives. We are particularly interested in products that are non-rivalrous in consumption, making all-you-can-eat pricing a viable candidate for efficiency. Our main economic points are the following: A la carte pricing may populate economic models but most products are bundles; they are bundles because bundles are generally more efficient. Tie-in sales are much less common and, we believe, not properly understood in textbook discussions. Market foreclosure, the principal efficiency concern with tying and bundling, is likely to be exceedingly rare. The seven instances of bundling (ties) examined are: cable television; patent pools; blanket licenses; iPods and iTunes; telephones; music albums and songs; and operating systems and component programs.

Keywords: bundles, tie-in sales, antitrust, bundling, foreclosure, cable television

JEL Classification: K21, l4, l12, l5, l6, l96, O3