Do Tying, Bundling, and Other Purchase Restraints Increase Product Quality?

17 Pages Posted: 2 Apr 2015 Last revised: 27 Jun 2018

See all articles by James D. Dana

James D. Dana

Northeastern University - Department of Economics; Northeastern University - Department of International Business and Strategy

Kathryn E. Spier

Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)

Date Written: March 30, 2015

Abstract

Tying, bundling, minimum purchase requirements, loyalty discounts, exclusive dealing, and other purchase restraints can create stronger incentives for firms to invest in product quality. In our first example, the firm sells a durable experience good and a complementary non-durable good to a representative consumer. Tying shifts profits from the durable to the non-durable good, making profits more sensitive to the consumer's experience. In our second example, the firm sells a single experience good to consumers with heterogeneous demands. Minimum purchase requirements screen out the low-volume consumers who would otherwise free ride on the superior monitoring of the high-volume consumers. The examples illustrate that purchase restraints can increase both firm profits and consumer surplus by making firm profits more sensitive to consumer experience, either directly by giving the consumer more control over the stream of profits or indirectly by constraining consumers to monitor more intensively.

Keywords: bundling, tying, loyalty discounts, exclusive dealing, experience goods, product quality

JEL Classification: L42, D82, K21, D04

Suggested Citation

Dana, James D. and Spier, Kathryn E., Do Tying, Bundling, and Other Purchase Restraints Increase Product Quality? (March 30, 2015). International Journal of Industrial Organization, Forthcoming, Northeastern U. D’Amore-McKim School of Business Research Paper No. 2587975, Available at SSRN: https://ssrn.com/abstract=2587975 or http://dx.doi.org/10.2139/ssrn.2587975

James D. Dana

Northeastern University - Department of Economics ( email )

301 Lake Hall
Boston, MA 02115
United States
617-373-7517 (Phone)

HOME PAGE: http://www.economics.neu.edu/dana/

Northeastern University - Department of International Business and Strategy

360 Huntington Ave
Boston, MA 02115
United States

Kathryn E. Spier (Contact Author)

Harvard University - Law School - Faculty ( email )

1575 Massachusetts
Hauser 302
Cambridge, MA 02138
United States
(617) 496-0019 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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