Content and Access Provision in a Discrete Competition Model

Abstract

The burgeoning digital economy is characterized by providers offering their products and services to consumers in bundles. This is hardly surprising, given that the non-rival, non-excludable and infinitely expansible characteristics of digital goods with marginal cost of zero strongly favor use of bundling strategies. Consequently, firms, policy-makers, competition authorities and courts are challenged to consider the actual and possible effects of bundling on profits, consumer and total welfare, sometimes in advance of products being brought to market. Current literature provides some guidance for evaluating possible outcomes. However, theoretical tractability requires most models to make highly stylized assumptions rarely observed or anticipated in the real-life situations motivating inquiry. Different ways of evaluating these complex cases are required. Numerical analysis of the output of simulation models endeavoring to capture the specific characteristics of the real-life cases offers an alternative means of evaluation. Using this approach, we consider a competition model in which: * the firms, consumers and differentiated products are finite in number; * prices are discrete and not continuous; * consumers may purchase multiple items in a single product category where the degree of complementarity or substitutability of the product categories can also vary across consumers; and * where consumer-specific cost savings are obtained when purchasing multiple items from the same firm. Approximate solutions are obtained through numerical simulation. The model corresponds to real-life business situations where firms have limited opportunities to sample information about a market where (for example) firms offer differentiated Internet access (e.g. cable and copper/fiber) and content offers (e.g. Netflix, Spotify, other proprietary video (television) content products, gaming, home security monitoring) both stand-alone and in bundles. In our model, the firms act in concert to maximize the total firm revenue. Our main finding is that the interplay between maximal firm revenue, consumer surplus and prices is very complex and that high firm revenue and high consumer surplus are not antithetic. It suggests also that consumer surplus and market concentration are not necessarily related and that many market outcomes that are observed may be due to chance rather than design as diverse outcomes can accompany situations that are, to the firms, difficult to distinguish.

Keywords: Information goods, Broadband, Bundling, Simulation

JEL Classification: L11, L12, L41, L42, L96