Paying for Loyalty: Product Bundling in Oligopoly
Melbourne Business School Working Paper No. 2004-06
27 Pages Posted: 19 Feb 2004
Date Written: February 2004
Abstract
In recent times, pairs of retailers such as supermarket and retail gasoline chains have offered bundled discounts to customers who buy their respective product brands. These discounts are a fixed amount off the headline prices that allied brands continue to set independently. In this paper, we model this bundling using Hotelling competition between two brands of each product. We show that a pair of firms can profit from offering a bundled discount to the detriment of firms who do not bundle and consumers whose preferences are farther removed from the bundled brands. Indeed, when both pairs of firms negotiate bundling arrangements, there are no beneficiaries (the effect on equilibrium profits is zero) and consumers simply find themselves consuming a sub-optimal brand mix. If the two separate products are owned by the same firm, additional complications arise although if both product sets are integrated, no bundled discounts are offered in equilibrium.
Keywords: Bundling, discounts, integration, imperfect competition
JEL Classification: L13, L41
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries
By Dennis W. Carlton and Michael Waldman
-
Innovation, Rent Extraction, and Integration in Systems Markets
By Joseph Farrell and Michael L. Katz
-
Bundling and Competition on the Internet
By Yannis Bakos and Erik Brynjolfsson
-
Vertical Foreclosure with the Choice of Input Specifications
By Jay Pil Choi and Sang-seung Yi
-
Two-Sided Network Effects: A Theory of Information Product Design
-
Tying and Innovation: A Dynamic Analysis of Tying Arrangements
By Jay Pil Choi
-
An Economist's Guide to U.S. V Microsoft
By Richard Gilbert and Michael L. Katz