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Product-bundling and Incentives for Merger and Strategic Alliance

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Abstract

This paper analyzes firms' choice between a merger and a strategic alliance in bundling their product with other complementary products. We consider a framework in which firms can improve profits only from product-bundling. While mixed bundling is not profitable, pure bundling is because pure bundling reduces consumers' choices, and thus softens competition among firms. Firms benefit the most from this reduced competition if they form an alliance. Firms do not gain as much from a merger because, internalizing the complementarity between the two products, a merged firm is inclined to pursue aggressive pricing to gain market share. Yet, firms may be motivated to choose a merger over an alliance because of foreclosure possibility as foreclosure is not possible under strategic alliance. However, in response, unmerged rivals can use a strategic alliance to avert foreclosure. Hence, the possibility of counter-bundling via strategic alliance by rivals reduces the incentives for merger. In equilibrium, bundling is offered only through strategic alliances.

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  • Sue Mialon, 2009. "Product-bundling and Incentives for Merger and Strategic Alliance," Emory Economics 0907, Department of Economics, Emory University (Atlanta).
  • Handle: RePEc:emo:wp2003:0907
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    Cited by:

    1. Halmenschlager, Christine & Mantovani, Andrea, 2017. "On the private and social desirability of mixed bundling in complementary markets with cost savings," Information Economics and Policy, Elsevier, vol. 39(C), pages 45-59.
    2. repec:eee:ecotra:v:11-12:y:2017:i::p:33-48 is not listed on IDEAS
    3. Jihui Chen, 2011. "Do Exclusivity Arrangments Harm Consumers?," Working Paper Series 20111001, Illinois State University, Department of Economics.
    4. repec:kap:regeco:v:51:y:2017:i:3:d:10.1007_s11149-017-9325-y is not listed on IDEAS
    5. Cristina Pardo-Garcia & Jose Sempere-Monerris, 2015. "Equilibrium mergers in a composite good industry with efficiencies," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 6(1), pages 101-127, March.
    6. Colantuoni, Francesca & Rojas, Christian, 2012. "Have soda sales tax effects changed over time? Scanner data comparison analyses," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124806, Agricultural and Applied Economics Association.
    7. Guy E.J. Faulkner & Paul Grootendorst & Van Hai Nguyen & Tatiana Andreyeva & Kelly Arbour-Nicitopoulos & Chris Auld & Sean B. Cash & John Cawley & Peter Donnelly & Adam Drewnowski & Laurette Dubé & Ro, 2011. "Economic Instruments for Obesity Prevention: Results of a Scoping Review and Modified Delphi Survey," Monash Economics Working Papers 31-11, Monash University, Department of Economics.

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    JEL classification:

    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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