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Vertical integration, bundled discounts and welfare

  • Maruyama, Masayoshi
  • Minamikawa, Kazumitsu
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    This paper studies firms' incentives for vertical integration and bundled discounts of complementary components. We assume that firms first choose ownership structures and pricing schemes, and then compete on price. We find that vertical integration and mixed bundling is a dominant strategy for all firms, while, except for systems of components that are highly differentiated, total surplus is maximized under independent ownership with bundled discounts. Thus, our model suggests that vertical separation is beneficial for both firms and consumers in such a situation of competitive bundling. Our results have important policy implications for broadband markets.

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    Article provided by Elsevier in its journal Information Economics and Policy.

    Volume (Year): 21 (2009)
    Issue (Month): 1 (February)
    Pages: 62-71

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    Handle: RePEc:eee:iepoli:v:21:y:2009:i:1:p:62-71
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    1. Anderson, Simon Peter & de Palma, Andre & Thisse, Jacques-Francois, 1988. "A Representative Consumer Theory of the Logit Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 461-66, August.
    2. Carmen Matutes & Pierre Regibeau, 1988. ""Mix and Match": Product Compatibility without Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 221-234, Summer.
    3. Matutes, Carmen & Regibeau, Pierre, 1992. "Compatibility and Bundling of Complementary Goods in a Duopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 37-54, March.
    4. Economides, Nicholas, 1989. "Desirability of Compatibility in the Absence of Network Externalities," American Economic Review, American Economic Association, vol. 79(5), pages 1165-81, December.
    5. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    6. 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.
    7. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 105-23, March.
    8. Anderson, Simon P. & Leruth, Luc, 1993. "Why firms may prefer not to price discriminate via mixed bundling," International Journal of Industrial Organization, Elsevier, vol. 11(1), pages 49-61, March.
    9. Joshua S. Gans & Stephen P. King, 2006. "PAYING FOR LOYALTY: PRODUCT BUNDLING IN OLIGOPOLY -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 54(1), pages 43-62, 03.
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