Bundling Revisited: Substitute Products and Inter-Firm Discounts
This paper extends the standard model of bundling to allow products to be substitutes and for products to be supplied by separate sellers.� Whether integrated or separate, firms have an incentive to introduce a bundling discount when demand for the bundle is elastic relative to demand for stand-alone products.� When products are partial substitutes, this typically gives an integrated firm a greater incentive to offer a bundle discount (relative to the standard model with additive preferences), while product substitutability is often the sole reason why separate sellers wish to offer inter-firm discounts.� When separate sellers negotiate their inter-firm discount, they can use the discount to relax competition.
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