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Interfirm Bundling and Vertical Product Differentiation

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  • Duarte Brito
  • Helder Vasconcelos

Abstract

In this paper, we study the competitive effects of bundled discounts offered by pairs of independent firms. In a setting with vertically differentiated goods, where firms decide whether to participate in a discounting scheme before prices are set, it is shown that, in equilibrium, all pairs of firms producing goods of the same quality level offer bundled discounts. Relative to the no-bundling benchmark, we find that (i) all headline prices rise, (ii) all bundle prices, net of the respective discount, decrease, and (iii) only high-quality sellers will obtain higher profits. Furthermore, this equilibrium corresponds to the worst scenario in terms of consumer welfare, and it and decreases social welfare.

Suggested Citation

  • Duarte Brito & Helder Vasconcelos, 2015. "Interfirm Bundling and Vertical Product Differentiation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 117(1), pages 1-27, January.
    • Handle: RePEc:bla:scandj:v:117:y:2015:i:1:p:1-27
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    File URL: http://hdl.handle.net/10.1111/sjoe.12073
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    Citations

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    Cited by:

    1. Ramon Caminal, 2022. "Time‐Limited Loyalty Rewards," Journal of Industrial Economics, Wiley Blackwell, vol. 70(4), pages 962-998, December.
    2. Matteo Alvisi & Emanuela Carbonara, 2020. "Cocktails done right: price competition and welfare when substitutes become complements," Journal of Economics, Springer, vol. 131(1), pages 1-38, September.
    3. Armstrong, Mark, 2013. "A more general theory of commodity bundling," Journal of Economic Theory, Elsevier, vol. 148(2), pages 448-472.
    4. Avenali, Alessandro & Bracaglia, Valentina & D'Alfonso, Tiziana & Reverberi, Pierfrancesco, 2018. "Strategic formation and welfare effects of airline-high speed rail agreements," Transportation Research Part B: Methodological, Elsevier, vol. 117(PA), pages 393-411.
    5. Hui‐Ling Chung & Jin‐Li Hu & Yan‐Shu Lin, 2022. "The leverage effect of bundling on monopoly power and product quality," Manchester School, University of Manchester, vol. 90(6), pages 668-688, December.
    6. Armstrong, Mark, 2010. "Bundling revisited: substitute products and inter-firm discounts," MPRA Paper 26782, University Library of Munich, Germany.
    7. Brito, Duarte & Vasconcelos, Helder, 2014. "Bundled discounts: Strategic substitutes or complements?," Economics Letters, Elsevier, vol. 124(2), pages 278-282.
    8. Thomas D. Jeitschko & Yeonjei Jung & Jaesoo Kim, 2017. "Bundling and joint marketing by rival firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(3), pages 571-589, September.
    9. Dominique-Ferreira, Sérgio, 2017. "How important is the strategic order of product attribute presentation in the non-life insurance market?," Journal of Retailing and Consumer Services, Elsevier, vol. 34(C), pages 138-144.
    10. Sun Keke, 2018. "Bundling, Vertical Differentiation, and Platform Competition," Review of Network Economics, De Gruyter, vol. 17(1), pages 1-23, March.
    11. Chung, Hui-Ling & Chen, Hung-Yi & Hu, Jin-Li & Lin, Yan-Shu, 2014. "Bundling With Quality Choice," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 55(2), pages 147-165, December.
    12. Jong-Hee Hahn & Sang-Hyun Kim, 2016. "Interfirm Bundled Discounts as a Collusive Device," Journal of Industrial Economics, Wiley Blackwell, vol. 64(2), pages 255-276, June.
    13. Raghu Nandan Giri & Shyamal Kumar Mondal & Manoranjan Maiti, 2020. "Bundle pricing strategies for two complementary products with different channel powers," Annals of Operations Research, Springer, vol. 287(2), pages 701-725, April.

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