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Endogenous Integration and Welfare in Complementary Goods Markets

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Abstract

This paper analyzes the strategic decision to integrate by firms that produce complementary products. Integration entails bundling pricing. We find out that integration is privately profitable for a high enough degree of product differentiation, that profits of the non-integrated firms decrease, and that consumer surplus need not necessarily increase when firms integrate despite the fact that prices diminish. Thus, integration of a system is welfare-improving for a high enough degree of product differentiation combined with a minimum demand advantage relative to the competing system. Overall, and from a number of extensions undertaken, we conclude that bundling need not be anti-competitive and that integration should be permitted only under some circumstances.

Suggested Citation

  • Ricardo Flores-Fillol & Rafael Moner-Colonques, 2006. "Endogenous Integration and Welfare in Complementary Goods Markets," UFAE and IAE Working Papers 658.06, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  • Handle: RePEc:aub:autbar:658.06
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    References listed on IDEAS

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    1. Jeffrey Church & Neil Gandal, 2000. "Systems Competition, Vertical Merger, and Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 25-51, March.
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    3. Gabszewicz, Jean & Sonnac, Nathalie & Wauthy, Xavier, 2001. "On price competition with complementary goods," Economics Letters, Elsevier, vol. 70(3), pages 431-437, March.
    4. 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 105-123, March.
    5. Christopher Garmon, 2004. "Complements Integration and Foreclosure: The Case of Joint Consumption," Southern Economic Journal, Southern Economic Association, vol. 70(4), pages 893-904, April.
    6. Morton I. Kamien & Israel Zang, 1990. "The Limits of Monopolization Through Acquisition," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 465-499.
    7. 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.
    8. Gaudet, Gerard & Salant, Stephen W., 1992. "Mergers of producers of perfect complements competing in price," Economics Letters, Elsevier, vol. 39(3), pages 359-364, July.
    9. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
    10. Liao, Chun-Hsiung & Tauman, Yair, 2002. "The role of bundling in price competition," International Journal of Industrial Organization, Elsevier, vol. 20(3), pages 365-389, March.
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    More about this item

    Keywords

    complementary products; integration; bundling;

    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
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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