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A more general theory of commodity bundling

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  • Armstrong, Mark

Abstract

This paper extends the standard model of bundling as a price discrimination device 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. Product substitutability typically gives an integrated firm a greater incentive to offer a bundle discount (relative to the model with additive preferences), while substitutability is often the sole reason why separate sellers wish to offer inter-firm discounts. When separate sellers coordinate on an inter-firm discount, they can use the discount to overturn product substitutability and relax competition.

Suggested Citation

  • Armstrong, Mark, 2012. "A more general theory of commodity bundling," MPRA Paper 37375, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:37375
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    References listed on IDEAS

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    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.
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    10. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
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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, 2018. "Bundled procurement," Journal of Public Economics, Elsevier, vol. 159(C), pages 116-127.
    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; oligopoly;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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