The Effects of Product Bundling in Duopoly

Markus Reisinger

Discussion Papers in Economics from University of Munich, Department of Economics

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.

Keywords: Product Bundling; Price Competition; Price Discrimination; Product Differentiation (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
Date: 2004-12
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:477

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