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Bundling and Competition on the Internet

Yannis Bakos

New York University (NYU) - Department of Information, Operations, and Management Sciences

Erik Brynjolfsson

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

September 1999

The Internet has significantly reduced the marginal cost of producing and distributing digital information goods. It also coincides with the emergence of new competitive strategies such as large scale bundling. In this paper, we show that bunding can create "economies of aggregation" for information goods if their marginal costs are very low, even in the absence of network externalities or economies of scale or scope.

We find that these economies of aggregation have several important competitive implications:

1. When competing for upstream content, larger bundlers are able to outbid smaller ones.

2. When competing for downstream consumers, the act of bundling information goods makes an incumbent seem "tougher" to single-product competitors selling similar goods. The resulting equilibrium is less profitable for potential entrants, and can discourage entry in the bundler's markets even when the entrants have a superior cost structure or quality.

3. Conversely, by simply adding an information good to an existing bundle, a bundler may be able to profitaby enter a new market and dislodge an incumbent who does not bundle, capturing most of the market share from the incumbent firm and even driving the incumbent out of business.

4. Because a bundler can potentially capture a large share of profits in new markets, single-product firms may have lower incentives to innovate and create such markets. However, bundlers may have higher incentives to innovate.

For most physical goods, which have non-trivial marginal costs, the potential impact of large-scale aggregation is limited. However, we find that these effects can be decisive for the success or failure of information goods. Our results have particular empirical relevance to the markets for software and Internet content.

Number of Pages in PDF File: 38

JEL Classification: D4, L1, O3

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Date posted: August 25, 2000  

Suggested Citation

Bakos, Yannis and Brynjolfsson, Erik, Bundling and Competition on the Internet (September 1999). Available at SSRN: https://ssrn.com/abstract=231598 or http://dx.doi.org/10.2139/ssrn.231598

Contact Information

Yannis Bakos (Contact Author)
New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )
44 West Fourth Street
New York, NY 10012
United States
212-998-0841 (Phone)
HOME PAGE: http://www.stern.nyu.edu/~bakos
Erik Brynjolfsson
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
Cambridge, MA 02142
United States
617-253-4319 (Phone)
HOME PAGE: http://digital.mit.edu/erik

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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