Supermarket and Gasoline: An Empirical Study of Bundled Discount

Abstract

Bundled discount is a widely used business practice and has been the key issue of prominent antitrust cases, yet the market effects of bundled discounts are rarely the subject of empirical studies. This paper studies the competitive effects of bundled discounts in an increasingly important setting: supermarket and gasoline retailing. Many supermarkets in the U.S. and other countries offer a grocery-gasoline bundled discount whereby supermarket customers receive a gasoline price discount if they purchase a certain amount of supermarket groceries. In this paper, we are able to observe the features and timing of the grocery-gasoline bundled discounts in an Australian market, track the pricing behaviour of the bundling firms and their competitors, and measure the competitiveness of the market before, during, and after the bundled discounts take effect. Our evidence suggests that grocery-gasoline bundled discounts are used as an advertising strategy, not as an exclusionary device. The results support the idea that bundled discount should not be assessed by the logic of single-product predatory pricing. The results also have implications on sales-below-cost laws.

Keywords: bundled discount, advertising, exclusion, predation

JEL Classification: K21, L4