Bundling and Consumer Misperception

Abstract

This Essay studies bundling of two (or more) products as a strategic response to consumer misperception. In contrast to the bundling and tying studied in the antitrust literature - strategies used by a seller with market power in market A trying to leverage its market power into market B - bundling in response to consumer misperception may occur in intensely competitive markets. The analysis demonstrates that such competitive bundling can be either welfare enhancing or welfare reducing. The Essay considers several "unbundling policies" that can protect consumers and increase welfare in markets where bundling is undesirable.