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Competitive Bundling

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  • Zhou, Jidong

Abstract

This paper proposes a model of competitive bundling with an arbitrary number of firms. In the regime of pure bundling, we find that relative to separate sales pure bundling tends to raise market prices, benefit firms, and harm consumers when the number of firms is above a threshold. This is in contrast to the findings in the duopoly case on which the existing literature often focuses. Our analysis also sheds new light on how consumer valuation dispersion affects price competition more generally. In the regime of mixed bundling, having more than two firms raises new challenges in solving the model. We derive the equilibrium pricing conditions and show that when the number of firms is large, the equilibrium prices have simple approximations and mixed bundling is generally pro-competitive relative to separate sales. Firms' incentives to bundle are also investigated.

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  • Zhou, Jidong, 2015. "Competitive Bundling," MPRA Paper 68358, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:68358
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    Cited by:

    1. Jeon, Doh-Shin & Menicucci, Domenico & Nasr, Nikrooz, 2016. "Compatibility Choices, Switching Costs and Data Portability: On the Role of the Non-Negative Pricing Constraint," TSE Working Papers 16-691, Toulouse School of Economics (TSE), revised Aug 2020.
    2. de Cornière, Alexandre & Taylor, Greg, 2017. "Application Bundling in System Markets," CEPR Discussion Papers 12129, C.E.P.R. Discussion Papers.
    3. Mark Armstrong & Jidong Zhou, 2022. "Consumer Information and the Limits to Competition," American Economic Review, American Economic Association, vol. 112(2), pages 534-577, February.
    4. Mark Armstrong, 2016. "Nonlinear Pricing," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 583-614, October.
    5. Aryal, Gaurab & Gabrielli, Maria F., 2020. "An empirical analysis of competitive nonlinear pricing," International Journal of Industrial Organization, Elsevier, vol. 68(C).
    6. Andrew Rhodes & Jidong Zhou, 2022. "Personalized Pricing and Competition," Cowles Foundation Discussion Papers 2329, Cowles Foundation for Research in Economics, Yale University.
    7. Sang‐Hyun Kim & Jong‐Hee Hahn, 2022. "On the profitability of interfirm bundling in oligopolies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(3), pages 657-673, August.
    8. Sarat Kumar Jena & Abhijeet Ghadge, 2022. "Product bundling and advertising strategy for a duopoly supply chain: a power-balance perspective," Annals of Operations Research, Springer, vol. 315(2), pages 1729-1753, August.
    9. Zhou, Jidong, 2021. "Mixed bundling in oligopoly markets," Journal of Economic Theory, Elsevier, vol. 194(C).
    10. Chen, Yongmin & Li, Jianpei, 2018. "Bundled procurement," Journal of Public Economics, Elsevier, vol. 159(C), pages 116-127.
    11. Thanassoulis, John, 2018. "The I.O. of ethics and cheating when consumers do not have rational expectations," CEPR Discussion Papers 13172, C.E.P.R. Discussion Papers.
    12. Tang, Yuanzhao & Perera, Sandun C. & Cao, Qingning & Ji, Xiang, 2023. "Supplier versus platform bundling: Optimal strategies under agency selling," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 179(C).
    13. Alexandre de Cornière & Greg Taylor, 2021. "Upstream Bundling and Leverage of Market Power [Commodity bundling and the burden of monopoly]," The Economic Journal, Royal Economic Society, vol. 131(640), pages 3122-3144.
    14. Shuai, Jie & Yang, Huanxing & Zhang, Lan, 2022. "Dominant firm and competitive bundling in oligopoly markets," Games and Economic Behavior, Elsevier, vol. 132(C), pages 421-447.
    15. Ilya Morozov & Stephan Seiler & Xiaojing Dong & Liwen Hou, 2021. "Estimation of Preference Heterogeneity in Markets with Costly Search," Marketing Science, INFORMS, vol. 40(5), pages 871-899, September.
    16. Zhou, Shu & Song, Boqian & Gavirneni, Srinagesh, 2020. "Bundling decisions in a two-product duopoly – Lead or follow?," European Journal of Operational Research, Elsevier, vol. 284(3), pages 980-989.
    17. Innocenti, Federico & Menicucci, Domenico, 2021. "Partial compatibility in oligopoly," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 351-378.
    18. Raoul Kübler & Rouven Seifert & Michael Kandziora, 2021. "Content valuation strategies for digital subscription platforms," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 45(2), pages 295-326, June.
    19. Liu, Xingyi, 2022. "Competitive pricing and advertising with spillover," Journal of Mathematical Economics, Elsevier, vol. 101(C).
    20. Angelika Endres-Fröhlich & Burkhard Hehenkamp & Joachim Heinzel, 2022. "The Impact of Product Differentiation on Retail Bundling in a Vertical Market," Working Papers Dissertations 91, Paderborn University, Faculty of Business Administration and Economics.
    21. Yufeng Huang, 2022. "Tied Goods and Consumer Switching Costs," Marketing Science, INFORMS, vol. 41(1), pages 93-114, January.
    22. Iaria, Alessandro & ,, 2020. "Identification and Estimation of Demand for Bundles," CEPR Discussion Papers 14363, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    bundling; multiproduct pricing; product compatibility; oligopoly;
    All these keywords.

    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
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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