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The Role Of Cost In Determining When Firms Offer Bundles

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  • DAVID S. EVANS
  • MICHAEL A. SALINGER

Abstract

We model competitive bundling and tying, allowing for marginal cost savings from bundling, fixed costs of product offerings, and variation in customer preferences. Pure bundling can arise either because few people demand only one component or because, with high fixed costs, a single product efficiently satisfies customers with diverse tastes. We conclude by analyzing empirically the bundling of pain relievers with decongestants. The discount for the bundled product is large. We argue that our model provides a simpler, more compelling explanation for the size of the discount than the demand‐centered approach to bundling by a monopolist.

Suggested Citation

  • David S. Evans & Michael A. Salinger, 2008. "The Role Of Cost In Determining When Firms Offer Bundles," Journal of Industrial Economics, Wiley Blackwell, vol. 56(1), pages 143-168, March.
    • Handle: RePEc:bla:jindec:v:56:y:2008:i:1:p:143-168
    DOI: 10.1111/j.1467-6451.2008.00336.x
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    References listed on IDEAS

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    1. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
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    Cited by:

    1. Balan, David J. & Deltas, George, 2013. "Better product at same cost, lower sales and lower welfare," International Journal of Industrial Organization, Elsevier, vol. 31(4), pages 322-330.
    2. Takanori Adachi & Takeshi Ebina & Makoto Hanazono, 2017. "Endogenous Product Boundary," Manchester School, University of Manchester, vol. 85(1), pages 13-40, January.
    3. Layne-Farrar, Anne & Salinger, Michael A., 2016. "Bundling of RAND-committed patents," Research Policy, Elsevier, vol. 45(6), pages 1155-1164.
    4. Halmenschlager, Christine & Mantovani, Andrea, 2017. "On the private and social desirability of mixed bundling in complementary markets with cost savings," Information Economics and Policy, Elsevier, vol. 39(C), pages 45-59.
    5. David S. Evans & Michael Salinger, 2004. "An Empirical Analysis of Bundling and Tying: Over-the-Counter Pain Relief and Cold Medicines," CESifo Working Paper Series 1297, CESifo.
    6. Sheikhzadeh, Mehdi & Elahi, Ehsan, 2013. "Product bundling: Impacts of product heterogeneity and risk considerations," International Journal of Production Economics, Elsevier, vol. 144(1), pages 209-222.
    7. Benjamin Davies & Richard Watt, 2017. "Bundling and Insurance of Independent Risks," Working Papers in Economics 17/05, University of Canterbury, Department of Economics and Finance.
    8. David S. Evans & Andrei Hagiu & Richard Schmalensee, 2005. "A Survey of the Economic Role of Software Platforms in Computer-based Industries," CESifo Economic Studies, CESifo Group, vol. 51(2-3), pages 189-224.
    9. David S. Evans & Michael Salinger, 2005. "Curing Sinus Headaches and Tying Law: An Empirical Analysis of Bundling Decongestants and Pain Relievers," CESifo Working Paper Series 1519, CESifo.

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