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Capping Bundle Discounts: Two Regulatory Rationales

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  • Martin C. Byford
  • Stephen King

Abstract

Mixed‐bundling of groceries and gasoline is common, but it raises ‘predatory’ concerns. This paper extends the standard Hotelling approach to consider bundled discounts when two conglomerates and an independent gasoline retailer compete. We show that bundling may result in exit and analyze the effects of capping discounts—a regulatory solution adopted in Australia. The optimal cap depends on the regulator’s objective and the potential for exit. When unregulated discounting leads to exit, an intermediate cap maximises consumer surplus. A cap also ensures that no consumer is worse off with the discounts, an outcome that does not occur with unregulated discounts.

Suggested Citation

  • Martin C. Byford & Stephen King, 2021. "Capping Bundle Discounts: Two Regulatory Rationales," Journal of Industrial Economics, Wiley Blackwell, vol. 69(2), pages 270-304, June.
    • Handle: RePEc:bla:jindec:v:69:y:2021:i:2:p:270-304
    DOI: 10.1111/joie.12251
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    References listed on IDEAS

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