Leveraging Dominance with Credible Bundling

55 Pages Posted: 7 Jun 2016

See all articles by Sjaak Hurkens

Sjaak Hurkens

Institute for Economic Analysis-CSIC; Barcelona GSE

Doh-Shin Jeon

Toulouse School of Economics (TSE); Centre for Economic Policy Research (CEPR)

Domenico Menicucci

Universita' degli Studi di Firenze

Date Written: May 2016

Abstract

We contribute to the leverage theory of tying by studying bundling of a dominant firm instead of a monopolist. We show that, when one firm has symmetric dominance across all markets, bundling has a positive demand size effect on the dominant firm but affects both firms similarly through the demand elasticity effect. The demand size affect is hump-shaped in dominance level whereas the demand elasticity affect is increasing and negative (positive) for low (high) dominance levels. This makes bundling credible for sufficiently strong dominance. In the case of asymmetric dominance levels, we identify three different circumstances in which a firm can credibly leverage its dominance in some (tying) markets to foreclose a dominant rival in other (tied) markets. Our findings provide a justification for the use of contractual bundling for foreclosure.

Keywords: Bundling, Dominance, Entry Barrier, leverage, Tying

JEL Classification: D43, L13, L41

Suggested Citation

Hurkens, J.P.M. (Sjaak) and Jeon, Doh-Shin and Menicucci, Domenico, Leveraging Dominance with Credible Bundling (May 2016). CEPR Discussion Paper No. DP11304, Available at SSRN: https://ssrn.com/abstract=2790820

J.P.M. (Sjaak) Hurkens (Contact Author)

Institute for Economic Analysis-CSIC

campus UAB
Bellaterra, 08193
Spain

Barcelona GSE ( email )

Barcelona
Spain
(34-93) 5806612 (Phone)
(34-93) 5801452 (Fax)

Doh-Shin Jeon

Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Domenico Menicucci

Universita' degli Studi di Firenze ( email )

via delle pandette 9
Firenze, 50127
Italy
+39-055-4374666 (Phone)
+39-055-4374913 (Fax)

HOME PAGE: http://www.dmd.unifi.it/index.php?loc=personal&id=d.menicucci

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