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The Effects of Product Bundling in Duopoly

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  • Reisinger, Markus

Abstract

This paper studies the incentives for multiproduct duopolists to sell their products as a bundle. It is shown that contrary to the monopoly case bundling may reduce profits and increase consumer rent. This is the case if consumers' reservation values are negatively correlated. The reason is that bundling reduces consumer heterogeneity and makes price competition more aggressive. This effect can dominate the sorting effect that is well known for the monopoly case. Firms are in a prisoner's dilemma situation because they would be better off without bundling. Despite the lower prices a welfare loss occurs because some consumers do not buy their prefered product which results in distributive inefficiency. If firms can influence the correlation by choosing their location in the product range they try to avoid negative correlation and choose minimal differentiation in one good.

Suggested Citation

  • Reisinger, Markus, 2004. "The Effects of Product Bundling in Duopoly," Discussion Papers in Economics 477, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenec:477
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    File URL: https://epub.ub.uni-muenchen.de/477/1/munichbundle.pdf
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    References listed on IDEAS

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    Cited by:

    1. Bong-Ju Kim & Inho Chung, 2010. "Inter-Market Competition Through Bundling In The Presence Of Cost Advantage," The Japanese Economic Review, Japanese Economic Association, vol. 61(1), pages 116-132.

    More about this item

    Keywords

    Product Bundling ; Price Competition ; Price Discrimination ; Product Differentiation;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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