Paying for Loyalty: Product Bundling in Oligopoly

20 Pages Posted: 8 May 2006

See all articles by Joshua S. Gans

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Stephen P. King

Monash University - Department of Economics; Productivity Commission

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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. We show that a pair of firms can profit from offering a bundled discount to the detriment of other firms and consumers whose preferences are farther removed from the bundled brands. Indeed, when both pairs of firms negotiate bundling arrangements, there are no beneficiaries and consumers simply find themselves consuming a sub-optimal brand mix.

Suggested Citation

Gans, Joshua S. and King, Stephen Peter, Paying for Loyalty: Product Bundling in Oligopoly. Journal of Industrial Economics, Vol. 54, No. 1, pp. 43-62, March 2006. Available at SSRN: https://ssrn.com/abstract=891509 or http://dx.doi.org/10.1111/j.1467-6451.2006.00275.x

Joshua S. Gans (Contact Author)

University of Toronto - Rotman School of Management ( email )

Canada

HOME PAGE: http://www.joshuagans.com

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Stephen Peter King

Monash University - Department of Economics ( email )

23 Innovation Walk
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Clayton, Victoria 3800
Australia

Productivity Commission ( email )

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Melbourne, Victoria, Victoria 3000
Australia

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