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Bundling by competitors and the sharing of profits

  • GINSBURGH, Victor
  • ZANG, Israel

We discuss the welfare effects of bundling two products offered by two symmetric firms. We first show that, in terms of welfare, a monopoly does better than a duopoly in which each firm sell its good and that a monopoly selling the bundle does better than if it sells the bundle and the two goods separately. We also show that the choice of the mechanism for sharing the profits, obtained from the sales of the bundle, might have dramatic positive or negative effects even when the various optional mechanisms yield equal splits. In particular, the use of the Shapley value yields the highest total and consumer surpluses and the lowest producer surplus, while the weighted Shapley value totally reverses the outcome and yields profits which are very close (over 99 pourcent) to the full monopoly profits. Hence, as in the case of bundling by a monopolist, when competitors bundle they assist each other in deterring entry. However, in addition when competitors bundle, they can implicitly cooperate via the setting of the profit sharing rule and increase their profits at the expense of customers. This issue calls for some further attention by regulators.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2005007.

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Date of creation: 00 Feb 2005
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Handle: RePEc:cor:louvco:2005007
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  1. Gregory S. Crawford, 2000. "The Impact of the 1992 Cable Act on Household Demand and Welfare," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 422-450, Autumn.
  2. Gregory Crawford, 2008. "The discriminatory incentives to bundle in the cable television industry," Quantitative Marketing and Economics, Springer, vol. 6(1), pages 41-78, March.
  3. GINSBURGH, Victor & ZANG, Israël, 2002. "The museum pass game and its value," CORE Discussion Papers 2002041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," The Journal of Business, University of Chicago Press, vol. 57(1), pages S211-30, January.
  5. 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.
  6. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 475-98, August.
  7. Barry Nalebuff, 2004. "Bundling as an Entry Barrier," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 159-187, February.
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