The Role of Cost in Determining When Firms Offer Bundles

Abstract:     
We incorporate marginal cost savings from bundling, fixed costs of product
offerings, and variation in customer preferences into a model of bundling and tying. To focus on cost effects, we assume perfectly contestable markets and analyze sustainable product offerings. Pure bundling can arise either because few people demand only one component or because, with high fixed costs, a single product is the efficient way to satisfy customers with diverse tastes. Two cases - sinus headache tablets and a package of four foreign plug adapters - illustrate the distinctions identified by the model.

Number of Pages in PDF File: 53

Keywords: Tying, Bundling, Contestable Markets

working papers series