Bundling as a Way to Leverage Monopoly

Abstract:     
This paper shows how a monopolist generally can increase its profits by offering a discount on its monopolized product if the customer agrees to buy a competitively supplied good from it at a price premium. The use of bundling to leverage market power has a long (and checkered) history in law and economics. The Chicago School seemed to end the debate with their result that there is only one monopoly profit and thus there is no gain from bundling. This folk theorem relies on some special assumptions, most importantly that the goods are consumed in fixed proportions. Once we allow for continuous consumption levels, then it is generally the case that a firm can extend a monopoly from A into a competitive B market. While it is well understood how a monopolist can use tying to extract more consumer surplus or to engage in price discrimination, this paper pursues a different motivation. The emphasis of this paper is on optional, as opposed to forced, tied sales. The firm offers to scale back its monopoly price in return for getting a price premium in a second market. The reduction in monopoly price causes no first-order loss to the firm, while providing a first-order incentive for customers to voluntarily accept the deal. The ability of a monopolist to extend its influence to adjacent markets is a challenge both to the competitors in those markets and to economists looking to understand the antitrust implications of bundling.

Keywords: bundling, tying, leverage monopoly, Chicago School, pricing

JEL Classifications: L12, L13, L41, C72, D42, D43, M21

Working Paper Series