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Bundling, Competition and Quality Investment: a Welfare Analysis

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  • Alessandro Avenali

    ()
    (Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma)

  • Anna D'Annunzio

    (Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma)

  • Pierfrancesco Reverberi

    ()
    (Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma)

Abstract

We show how a monopolist in a primary market uses mixed bundling to extract surplus from quality-enhancing investment by a single-product rival in a complementary market, or even force the rival to provide low quality. In our model, bundling does not hinge on commitment ability. Although we assume that bundling creates efficiency gains, we find that bundling reduces consumer surplus and may reduce social welfare, even if the rival is not foreclosed, and investment is not blockaded. Nonetheless, bundling improves welfare when prevents inefficient investment. We propose to check bundled offers via a price test that controls the monopoly component stand-alone price to preserve efficiencies from both bundling and investment. When the rival invests, the test improves consumer surplus and welfare compared with the 'do-nothing' scenario, or a ban on bundling. The test is not consistent with the predatory pricing framework. Qualitative results hold when we endogenize the bundling strategy.

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File URL: http://www.dis.uniroma1.it/~bibdis/RePEc/aeg/wpaper/2011-02.pdf
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Paper provided by Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza" in its series DIS Technical Reports with number 2011-02.

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Date of creation: 2011
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Handle: RePEc:aeg:wpaper:2011-2

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Keywords: Bundling; Vertical differentiation; Price discrimination; Price test;

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