Bundling, A La Carte Pricing and Vertical Bargaining in a Two-Sided Model

Abstract:     
We develop a two-sided market model with an upstream-downstream structure. More specifically, the platform consists of two rival upstream firms and a downstream monopolist. Each upstream firm negotiates the input price (license fee) with the downstream monopolist and also chooses the amount of advertising that is embedded in the good it sells to the downstream monopolist. The downstream monopolist, in turn, decides how to offer the two goods: a la carte, as a pure bundle, or in a mixed bundle. We use this model to understand the incentives to bundle and the properties of bundling in a two-sided market framework. We find that pure bundling may strictly dominate mixed bundling. We also contribute to the ongoing debate on a la carte pricing in the TV industry, where the two upstream firms can be viewed as two rival TV networks and the downstream monopolist as a cable operator.

Number of Pages in PDF File: 26

working papers series