Economics of Digital Bundling: The Impacts of Digitization on the Music Industry

Abstract

Drawing from recent literature on bundling theory, this paper explores the implications of digital bundling for the music industry. Bundling can be very effective as both a profit-maximizing tool and a competitive weapon, particularly as electronic distribution of digital music files gains momentum. Contrary to the popular belief that digital distribution will lower barriers of entry and allow many new firms to enter, this study finds that bundling will lead to greater industry concentration and increasing market power for the large music companies. Despite the disrupting forces caused by digital technologies, the economics of bundling, the control of content, and the existing industry structure suggest that the major record labels will retain their power and the industry will continue to be concentrated, perhaps even becoming more so in the future.

Keywords: Bundling, digital goods, music, digitization, competition, industry structure