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A more general theory of commodity bundling

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  • Armstrong, Mark

Abstract

This paper extends the standard model of bundling as a price discrimination device to allow products to be substitutes and for products to be supplied by separate sellers. Whether integrated or separate, firms have an incentive to introduce a bundling discount when demand for the bundle is elastic relative to demand for stand-alone products. Product substitutability typically gives an integrated firm a greater incentive to offer a bundle discount (relative to the model with additive preferences), while substitutability is often the sole reason why separate sellers wish to offer inter-firm discounts. When separate sellers coordinate on an inter-firm discount, they can use the discount to overturn product substitutability and relax competition.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 37375.

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Date of creation: Mar 2012
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Handle: RePEc:pra:mprapa:37375

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Keywords: Price discrimination; bundling; oligopoly;

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  1. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(3), pages 475-98, August.
  2. Gregory Pavlov, 2010. "Optimal Mechanism for Selling Two Goods," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 20103, University of Western Ontario, Department of Economics.
  3. Long, John B, Jr, 1984. "Comments on "Gaussian Demand and Commodity Bundling."," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 57(1), pages S235-46, January.
  4. Schmalensee, Richard, 1982. "Commodity Bundling by Single-Product Monopolies," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 25(1), pages 67-71, April.
  5. Joshua S. Gans & Stephen P. King, 2006. "PAYING FOR LOYALTY: PRODUCT BUNDLING IN OLIGOPOLY -super-* ," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 54(1), pages 43-62, 03.
  6. John Thanassoulis, 2007. "Competitive Mixed Bundling and Consumer Surplus," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 16(2), pages 437-467, 06.
  7. Giacomo Calzolari & Vincenzo Denicol?, 2013. "Competition with Exclusive Contracts and Market-Share Discounts," American Economic Review, American Economic Association, American Economic Association, vol. 103(6), pages 2384-2411, October.
  8. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer.
  9. R. Venkatesh & Wagner Kamakura, 2003. "Optimal Bundling and Pricing under a Monopoly: Contrasting Complements and Substitutes from Independently Valued Products," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 76(2), pages 211-232, April.
  10. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
  11. Claudio Lucarelli & Sean Nicholson & Minjae Song, 2010. "Bundling Among Rivals: A Case of Pharmaceutical Cocktails," NBER Working Papers 16321, National Bureau of Economic Research, Inc.
  12. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, Econometric Society, vol. 64(1), pages 51-75, January.
  13. McAfee, R Preston & McMillan, John & Whinston, Michael D, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(2), pages 371-83, May.
  14. Matthew Gentzkow, 2007. "Valuing New Goods in a Model with Complementarity: Online Newspapers," American Economic Review, American Economic Association, American Economic Association, vol. 97(3), pages 713-744, June.
  15. Lewbel, Arthur, 1985. "Bundling of substitutes or complements," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 3(1), pages 101-107, March.
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Cited by:
  1. Alexei Alexandrov & Özlem Bedre-Defolie, 2013. "The equivalence of bundling and advance sales," ESMT Research Working Papers, ESMT European School of Management and Technology ESMT-13-11, ESMT European School of Management and Technology.
  2. Chen, Yongmin & Zhang, Tianle, 2014. "Interpersonal Bundling," MPRA Paper 56165, University Library of Munich, Germany.

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