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Tying and Bundling in a Nearly Contestable Market

45 Pages Posted: 6 Jun 2011  

Michael A. Salinger

Boston University - Questrom School of Business

Date Written: May 2011

Abstract

This paper presents a model of bundling and tying when the threat of entry provides the primary competitive constraint, but entrants have a disadvantage with respect to the incumbent, i.e., in a, “nearly contestable,” market. The entrant’s disadvantage can be with respect to marginal costs, the fixed cost of a good, or the fixed cost of an offering (which can be interpreted as a product differentiation advantage). The incumbent’s profits depend on both the nature of its cost advantage and the set of offerings. With an advantage in the fixed cost of an offering, the incumbent prefers mixed bundling if it is sustainable. With a marginal cost advantage, the incumbent prefers pure bundling, in which all customers buy both components. While the latter result might appear to formalize a commonly-alleged rationale for tying, the practice can be a Pareto improvement over mixed bundling and can cause total consumer surplus to increase relative to only selling the products separately. Mixed bundling can lower consumer surplus and be a form of product proliferation.

Keywords: tying, bundling, contestable markets, product selection

JEL Classification: L10, L11, L14

Suggested Citation

Salinger, Michael A., Tying and Bundling in a Nearly Contestable Market (May 2011). Available at SSRN: https://ssrn.com/abstract=1857551 or http://dx.doi.org/10.2139/ssrn.1857551

Michael A. Salinger (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-353-4408 (Phone)

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