Bundling revisited: substitute products and inter-firm discounts

Armstrong, Mark (2011): Bundling revisited: substitute products and inter-firm discounts.

Abstract

This paper extends the standard model of bundling 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 bundling discounts when demand for the bundle is elastic relative to demand for stand-alone products. When products are partial substitutes, this typically gives an integrated firm a greater incentive to offer a bundle discount (relative to the standard model with additive preferences), while product substitutability is often the sole reason why separate sellers wish to offer inter-firm discounts. When separate sellers negotiate their inter-firm discount, they can use the discount to relax subsequent competition.

• Item Type: MPRA Paper
• Language: English
• Keywords: Price discrimination; bundling; oligopoly; loyalty pricing
• Subjects: M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising > M31 - Marketing; L - Industrial Organization > L4 - Antitrust Issues and Policies > L42 - Vertical Restraints ; Resale Price Maintenance ; Quantity Discounts; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection

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