Bundling and Economies of Scope

Abstract:     
This paper examines how bundling and economies of scope impact competition. We model a duopoly where two firms, produce the two components of a system. We show that firms always have a unilateral incentive to target a discount to consumers who buy the two goods close to the same firm. In our model, the Nash equilibrium is one of mixed bundling. The economies of scope (created by bundling) act to reduce (increase) firms' profits when the market is completely (partially) covered. Moreover, economies of scope act to increase consumer surplus.

Number of Pages in PDF File: 13

Keywords: Bundling, economies of scope, triple and quadruple play

JEL Classification: L11, M31

Accepted Paper Series