Interfirm Bundling and Vertical Product Differentiation

27 Pages Posted: 17 Dec 2014

See all articles by Duarte Brito

Duarte Brito

New University of Lisbon

Helder Vasconcelos

Universidade do Porto - Faculdade de Economia (FEP)

Date Written: January 2015

Abstract

In this paper, we study the competitive effects of bundled discounts offered by pairs of independent firms. In a setting with vertically differentiated goods, where firms decide whether to participate in a discounting scheme before prices are set, it is shown that, in equilibrium, all pairs of firms producing goods of the same quality level offer bundled discounts. Relative to the no‐bundling benchmark, we find that (i) all headline prices rise, (ii) all bundle prices, net of the respective discount, decrease, and (iii) only high‐quality sellers will obtain higher profits. Furthermore, this equilibrium corresponds to the worst scenario in terms of consumer welfare, and it and decreases social welfare.

Keywords: Bilateral bundling, bundled discounts, vertical differentiation

JEL Classification: D43, L13, L41

Suggested Citation

Brito, Duarte and Vasconcelos, Helder, Interfirm Bundling and Vertical Product Differentiation (January 2015). The Scandinavian Journal of Economics, Vol. 117, Issue 1, pp. 1-27, 2015. Available at SSRN: https://ssrn.com/abstract=2539762 or http://dx.doi.org/10.1111/sjoe.12073

Duarte Brito (Contact Author)

New University of Lisbon ( email )

1099-085 Lisboa, 1099-085
Portugal

Helder Vasconcelos

Universidade do Porto - Faculdade de Economia (FEP) ( email )

Rua Dr. Roberto Frias
s/n
4200-464 Porto, 4200-464
Portugal

HOME PAGE: http://www.fep.up.pt/docentes/hvasconcelos

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