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Bundling in a Distribution Channel with Retail Competition

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  • Joachim Heinzel

    (Paderborn University)

Abstract

We analyze the incentives for retail bundling and the welfare effects of retail bundling in a decentralized distribution channel with two retailers and two monopolistic manufacturers. One manufacturer exclusively sells his good to one retailer, whereas the other manufacturer sells his good to both retailers. Thus, one retailer is a monopolist for one product but competes with the other retailer in the second product market. The two-product retailer has the option to bundle his goods or to sell them separately. We find that bundling aggravates the double marginalization problem for the bundling retailer. Nevertheless, when the retailers compete in prices, bundling can be more profitable than separate selling for the retailer as bundling softens the retail competition. The ultimate outcome depends on the manufacturers’ marginal costs. Given retail quantity competition, however, bundling is in no case the retailer’s best strategy. Furthermore, we show that profitable bundling reduces consumer and producer surplus in the equilibrium.

Suggested Citation

  • Joachim Heinzel, 2019. "Bundling in a Distribution Channel with Retail Competition," Working Papers CIE 120, Paderborn University, CIE Center for International Economics.
  • Handle: RePEc:pdn:ciepap:120
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    References listed on IDEAS

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    Cited by:

    1. Angelika Endres & Joachim Heinzel, 2019. "The Impact of Product Qualities on Downstream Bundling in a Distribution Channel," Working Papers CIE 124, Paderborn University, CIE Center for International Economics.

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    More about this item

    Keywords

    retail bundling; leverage theory; double marginalization;
    All these keywords.

    JEL classification:

    • 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
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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