Bundling and Compatibility: Selling the Whole Package May Be Pro-Competitive

Abstract:     
In this paper we study price competition, equilibrium market configurations and entry decisions when firms compete in vertically-differentiated markets producing complementary goods. We show that allowing firms to sell complementary goods may be welfare-enhancing and pro-competitive. In fact, such strategy favors the entry of new firms producing lower-quality components. Moreover, this strategy increases consumer surplus, even when firms sell the two complements as a bundle. Interestingly, notwithstanding the increase in competition, it is always optimal for firms to enter a complementary good market. By discouraging such practices, antitrust authorities may harm both consumers and low-quality firms, at the same time undermining market stability.

Number of Pages in PDF File: 37

Keywords: complements, bundling, compatibility, complementary monopoly, foreclosure, vertical differentiation

JEL Classification: C7, D42, D43, K21, L11, L12, L13, L40, M21

working papers series