Tying, Bundling, and Double Marginalization

Abstract

We provide a general definition of bundling that encompasses the bundling of two or more objects over sets of three or more objects. Bundled objects may be units of the same product, different products, or both. Such bundling encompasses a range of controversial pricing practices that have drawn antitrust scrutiny in recent years. By nesting these practices in a common framework we are able to analyze their microfoundations. We find that the pricing inefficiency generally known as "double marginalization" arises not from the absence of inframarginal transfers, but from the inability to bundle objects over which the buyer experiences declining incremental benefits. Whether the objects are units of the same product or different products makes no difference. Thus, we identify an efficiency benefit of tying and bundling that has been missed in the literature. We discuss the implications of our findings for public policy toward these practices.

Keywords: Tying, Bundling, Double Marginalization, Monopoly, Nonlinear Pricing

JEL Classification: D01, D42, L12, L42