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Bundling, Competition and Quality Investment: A Welfare Analysis

Author

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  • Alessandro Avenali
  • Anna D’Annunzio
  • Pierfrancesco Reverberi

Abstract

We investigate how bundling affects investment in product quality, and derive welfare implications. A monopolist in a primary market competes with a rival in a complementary market. Bundling is the monopolist’s preferred strategy, since it either extracts surplus from the rival’s investment, or forces the rival to provide low quality. Bundling may reduce welfare without foreclosing the rival, but improves welfare when preventing undesirable investment. Since prohibiting bundling is not appropriate, we introduce a price test for bundled offers that preserves efficiencies from both bundling and quality investment, thereby improving welfare relative to the ‘do-nothing’ scenario. We consequently argue that this test should be applied whenever possible. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Alessandro Avenali & Anna D’Annunzio & Pierfrancesco Reverberi, 2013. "Bundling, Competition and Quality Investment: A Welfare Analysis," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 43(3), pages 221-241, November.
    • Handle: RePEc:kap:revind:v:43:y:2013:i:3:p:221-241
    DOI: 10.1007/s11151-013-9378-8
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    1. Avenali, Alessandro & Matteucci, Giorgio & Reverberi, Pierfrancesco, 2014. "Broadband investment and welfare under functional and ownership separation," Information Economics and Policy, Elsevier, vol. 28(C), pages 70-82.
    2. 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.
    3. 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.
    4. 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.
    5. Avenali, Alessandro & Boitani, Andrea & Catalano, Giuseppe & D’Alfonso, Tiziana & Matteucci, Giorgio, 2018. "Assessing standard costs in local public bus transport: A hybrid cost model," Transport Policy, Elsevier, vol. 62(C), pages 48-57.
    6. Morales Sarriera, Javier & Salvucci, Frederick P. & Zhao, Jinhua, 2018. "Worse than Baumol's disease: The implications of labor productivity, contracting out, and unionization on transit operation costs," Transport Policy, Elsevier, vol. 61(C), pages 10-16.
    7. Page, Kenneth & Pérez, Juan & Telha, Claudio & García-Echalar, Andrés & López-Ospina, Héctor, 2021. "Optimal bundle composition in competition for continuous attributes," European Journal of Operational Research, Elsevier, vol. 293(3), pages 1168-1187.
    8. Sheng, Dian & Li, Zhi-Chun & Xiao, Yi-bin & Fu, Xiaowen, 2015. "Slot auction in an airport network with demand uncertainty," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 82(C), pages 79-100.
    9. Tiziana D'Alfonso & Valentina Bracaglia & Yulai Wan, 2015. "Airport cities and multiproduct pricing," DIAG Technical Reports 2015-14, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
    10. Avenali, Alessandro & Boitani, Andrea & Catalano, Giuseppe & D’Alfonso, Tiziana & Matteucci, Giorgio, 2016. "Assessing standard costs in local public bus transport: Evidence from Italy," Transport Policy, Elsevier, vol. 52(C), pages 164-174.
    11. D׳Annunzio, Anna & Reverberi, Pierfrancesco, 2016. "Co-investment in ultra-fast broadband access networks: Is there a role for content providers?," Telecommunications Policy, Elsevier, vol. 40(4), pages 353-367.
    12. Correa, Alexander, 2020. "Empaquetamiento e incentivos para mejoras en calidad || Packaging and quality improvements," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 30(1), pages 163-195, December.
    13. Avenali, Alessandro & D'Alfonso, Tiziana & Leporelli, Claudio & Matteucci, Giorgio & Nastasi, Alberto & Reverberi, Pierfrancesco, 2015. "An incentive pricing mechanism for efficient airport slot allocation in Europe," Journal of Air Transport Management, Elsevier, vol. 42(C), pages 27-36.

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    More about this item

    Keywords

    Bundling; Quality investment; Vertical differentiation; Price discrimination; Price test; L13; L41;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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