The Impact of Product Qualities on Downstream Bundling in a Distribution Channel

Angelika Endres () and Joachim Heinzel ()
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Angelika Endres: Paderborn University
Joachim Heinzel: Paderborn University

No 127, Working Papers CIE from Paderborn University, CIE Center for International Economics

Abstract: We study the impact of exogenous product qualities on a downstream firm’s decision to bundle and the welfare effects of downstream bundling. We consider a distribution channel with two downstream firms and two price-setting monopolistic upstream producers. One upstream firm sells its good 1 exclusively to one downstream firm and the other upstream firm sells its good 2 to both downstream firms. The downstream firms compete in prices and the two-product downstream firm has the option to bundle its goods. We find that downstream bundling aggravates the problem of double marginalization in the channel, but reduces the intensity of downstream competition. Finally, bundling is profitable for the two-product downstream firm only when the quality of good 2 exceeds the quality of good 1. However, bundling is always profitable when the production process is controlled by the downstream industry. The impact on total welfare is ambiguous and depends on the distribution of market power in the channel and the quality levels of the goods.

Keywords: channel conflicts; double marginalization; downstream bundling; leverage theory; quality differentiation (search for similar items in EconPapers)
JEL-codes: D21 D61 L11 L15 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2019-08
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pdn:ciepap:127

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