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A More General Theory of Commodity Bundling

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  • Mark Armstrong

Abstract

This paper discusses the incentive to bundle when consumer valuations are non-additive and/or when products are supplied by separate sellers. Whether integrated or separate, a firm has an incentive to introduce a bundle discount when demand for the bundle is more elastic than the overall demand for products. When separate sellers coordinate on a bundle discount, they can use the discount to relax competition, which can harm welfare.

Suggested Citation

  • Mark Armstrong, 2012. "A More General Theory of Commodity Bundling," Economics Series Working Papers 624, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:624
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    File URL: http://www.economics.ox.ac.uk/materials/papers/12264/paper624.pdf
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    References listed on IDEAS

    as
    1. Pavlov Gregory, 2011. "Optimal Mechanism for Selling Two Goods," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-35, February.
    2. John Thanassoulis, 2007. "Competitive Mixed Bundling and Consumer Surplus," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(2), pages 437-467, June.
    3. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer.
    4. Joshua S. Gans & Stephen P. King, 2006. "PAYING FOR LOYALTY: PRODUCT BUNDLING IN OLIGOPOLY -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 54(1), pages 43-62, March.
    5. Giacomo Calzolari & Vincenzo Denicol?, 2013. "Competition with Exclusive Contracts and Market-Share Discounts," American Economic Review, American Economic Association, vol. 103(6), pages 2384-2411, October.
    6. Schmalensee, Richard, 1982. "Commodity Bundling by Single-Product Monopolies," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 67-71, April.
    7. Claudio Lucarelli & Sean Nicholson & Minjae Song, 2010. "Bundling Among Rivals: A Case of Pharmaceutical Cocktails," NBER Working Papers 16321, National Bureau of Economic Research, Inc.
    8. Matthew Gentzkow, 2007. "Valuing New Goods in a Model with Complementarity: Online Newspapers," American Economic Review, American Economic Association, vol. 97(3), pages 713-744, June.
    9. Lewbel, Arthur, 1985. "Bundling of substitutes or complements," International Journal of Industrial Organization, Elsevier, vol. 3(1), pages 101-107, March.
    10. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
    11. Long, John B, Jr, 1984. "Comments on "Gaussian Demand and Commodity Bundling."," The Journal of Business, University of Chicago Press, vol. 57(1), pages 235-246, January.
    12. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
    13. R. Venkatesh & Wagner Kamakura, 2003. "Optimal Bundling and Pricing under a Monopoly: Contrasting Complements and Substitutes from Independently Valued Products," The Journal of Business, University of Chicago Press, vol. 76(2), pages 211-232, April.
    14. Duarte Brito & Helder Vasconcelos, 2015. "Interfirm Bundling and Vertical Product Differentiation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 117(1), pages 1-27, January.
    15. R. Preston McAfee & John McMillan & Michael D. Whinston, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 371-383.
    16. William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 90(3), pages 475-498.
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    Citations

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    Cited by:

    1. Ketelaar, Felix & Szalay, Dezsö, 2014. "Pricing a Package of Services - When (not) to bundle," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 487, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    2. Attila Ambrus & Emilio Calvano & Markus Reisinger, 2016. "Either or Both Competition: A "Two-Sided" Theory of Advertising with Overlapping Viewerships," American Economic Journal: Microeconomics, American Economic Association, vol. 8(3), pages 189-222, August.
    3. repec:spr:ijsaem:v:8:y:2017:i:2:d:10.1007_s13198-017-0581-0 is not listed on IDEAS
    4. Mark Armstrong, 2016. "Nonlinear Pricing," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 583-614, October.
    5. repec:bla:manchs:v:85:y:2017:i:1:p:13-40 is not listed on IDEAS
    6. Armstrong, Mark & Vickers, John, 2015. "Which demand systems can be generated by discrete choice?," Journal of Economic Theory, Elsevier, vol. 158(PA), pages 293-307.
    7. Banciu, M. & Ødegaard, F., 2016. "Optimal product bundling with dependent valuations: The price of independence," European Journal of Operational Research, Elsevier, vol. 255(2), pages 481-495.
    8. Yongmin Chen & Tianle Zhang, 2015. "Interpersonal Bundling," Management Science, INFORMS, vol. 61(6), pages 1456-1471, June.
    9. Ketelaar, Felix & Szalay, Dezso, 2014. "Pricing a Package of Services," CEPR Discussion Papers 10313, C.E.P.R. Discussion Papers.
    10. Alexei Alexandrov & Özlem Bedre-Defolie, 2013. "The equivalence of bundling and advance sales," ESMT Research Working Papers ESMT-13-11, ESMT European School of Management and Technology.
    11. Steve Berry & Ahmed Khwaja & Vineet Kumar & Andres Musalem & Kenneth Wilbur & Greg Allenby & Bharat Anand & Pradeep Chintagunta & W. Hanemann & Przemek Jeziorski & Angelo Mele, 2014. "Structural models of complementary choices," Marketing Letters, Springer, vol. 25(3), pages 245-256, September.
    12. Cataldo, Alejandro & Ferrer, Juan–Carlos, 2017. "Optimal pricing and composition of multiple bundles: A two-step approach," European Journal of Operational Research, Elsevier, vol. 259(2), pages 766-777.
    13. Farhi, Emmanuel & Tirole, Jean, 2015. "Liquid bundles," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 634-655.
    14. Rochet, Jean-Charles & Thanassoulis, John, 2017. "Intertemporal Price Discrimination with Multiple Products," CEPR Discussion Papers 12034, C.E.P.R. Discussion Papers.
    15. Chen, Yongmin & Li, Jianpei, 2015. "Bundled procurement," MPRA Paper 63423, University Library of Munich, Germany.
    16. Jong-Hee Hahn & Sang-Hyun Kim, 2016. "Interfirm Bundled Discounts as a Collusive Device," Journal of Industrial Economics, Wiley Blackwell, vol. 64(2), pages 255-276, June.
    17. repec:eee:indorg:v:57:y:2018:i:c:p:1-34 is not listed on IDEAS
    18. Anderson, Simon P. & Celik, Levent, 2015. "Product line design," Journal of Economic Theory, Elsevier, vol. 157(C), pages 517-526.

    More about this item

    Keywords

    Price discrimination; Bundling; Discrete choice; Oligopoly; Common agency;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • 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

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