Interfirm Bundling and Vertical Product Differentiation†
We are grateful to three anonymous referees for their thorough and thoughtful reports. We have also benefited from useful comments and suggestions on earlier versions given by Mark Armstrong, Pedro Pita Barros, João Gata, and Massimo Motta. We are also grateful for comments from seminar participants at the 2012 EARIE Conference in Rome and at the 2012 UECE Lisbon Meetings – Game Theory and Applications. All errors are the authors' sole responsibility. This paper was financed by national funds from the Fundação para a Ciência e a Tecnologia (FCT) under project PTDC/EGE‐ECO/111558/2009.
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Abstract
In this paper, we study the competitive effects of bundled discounts offered by pairs of independent firms. In a setting with vertically differentiated goods, where firms decide whether to participate in a discounting scheme before prices are set, it is shown that, in equilibrium, all pairs of firms producing goods of the same quality level offer bundled discounts. Relative to the no‐bundling benchmark, we find that (i) all headline prices rise, (ii) all bundle prices, net of the respective discount, decrease, and (iii) only high‐quality sellers will obtain higher profits. Furthermore, this equilibrium corresponds to the worst scenario in terms of consumer welfare, and it and decreases social welfare.
