The Effects of Product Bundling in Duopoly

Reisinger, Markus (December 2004): The Effects of Product Bundling in Duopoly. Discussion Papers in Economics 2004-26

Abstract

This paper studies the incentives for multiproduct duopolists to sell their products as a bundle. It is shown that contrary to the monopoly case bundling may reduce profits and increase consumer rent. This is the case if consumers' reservation values are negatively correlated. The reason is that bundling reduces consumer heterogeneity and makes price competition more aggressive. This effect can dominate the sorting effect that is well known for the monopoly case. Firms are in a prisoner's dilemma situation because they would be better off without bundling. Despite the lower prices a welfare loss occurs because some consumers do not buy their prefered product which results in distributive inefficiency. If firms can influence the correlation by choosing their location in the product range they try to avoid negative correlation and choose minimal differentiation in one good.

• Item Type: Paper (Discussion Paper)
• Keywords: Product Bundling ; Price Competition ; Price Discrimination ; Product Differentiation
• Subjects: Economics; Economics > Discussion Papers in Economics; Economics > Discussion Papers in Economics > Industrial Organization
• Dewey Classification: 300 Social sciences; 300 Social sciences > 330 Wirtschaft
• Journal of Economic Literature classification: D43, L13
• Language: English