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Bundling, Competition and Quality Investment: a Welfare Analysis

Author

Listed:
  • 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.

Suggested Citation

  • Alessandro Avenali & Anna D'Annunzio & Pierfrancesco Reverberi, 2011. "Bundling, Competition and Quality Investment: a Welfare Analysis," DIS Technical Reports 2011-02, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
  • Handle: RePEc:aeg:wpaper:2011-2
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    References listed on IDEAS

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    Cited by:

    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 & 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.
    3. 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".
    4. 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.
    5. repec:eee:trapol:v:61:y:2018:i:c:p:10-16 is not listed on IDEAS
    6. 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.

    More about this item

    Keywords

    Bundling; Vertical differentiation; Price discrimination; Price test;

    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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