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

Angelika Endres-Fröhlich () and Joachim Heinzel ()
Additional contact information
Angelika Endres-Fröhlich: Paderborn University
Joachim Heinzel: Paderborn University

No 90, Working Papers Dissertations from Paderborn University, Faculty of Business Administration and Economics

Abstract: Research has found that downstream bundling aggravates the problem of double marginalization in a decentralized channel, but reduces the intensity of downstream price competition when trading homogeneous goods. We study the validity of those results in a set-up where the traded goods have heterogeneous product qualities. We find that the quality relation between the goods determines whether the competition reduction effect of bundling outweighs the aggravation of double marginalization in a decentralized channel. Thus, the quality relation between the goods determines the profitability of downstream bundling. The underlying market consists of a distribution channel with two downstream firms and two price-setting monopolistic upstream producers. One upstream firm sells good 1 exclusively to one downstream firm and the other upstream firm sells good 2 to both downstream firms. The downstream firms compete in prices and the two-product downstream firm has the option to bundle both goods. In particular, we find bundling to be profitable for the two-product downstream firm only when the quality of good 2 exceeds the quality of good 1. However, we find bundling always to be 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: 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: 44
Date: 2022-04
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic, nep-ore and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://groups.uni-paderborn.de/wp-wiwi/RePEc/pdf/dispap/DP90.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pdn:dispap:90

Access Statistics for this paper

More papers in Working Papers Dissertations from Paderborn University, Faculty of Business Administration and Economics Contact information at EDIRC.
Bibliographic data for series maintained by WP-WiWi-Info ().