Competitive Bundling and Offer Design in a Symmetric Bertrand Duopoly

Guillaume Roels (), Araz Khodabakhshian () and Uday S. Karmarkar ()
Additional contact information
Guillaume Roels: INSEAD, Fontainebleau 77300, France
Araz Khodabakhshian: The Walt Disney Company, Burbank, California 91521
Uday S. Karmarkar: UCLA Anderson School of Management, University of California, Los Angeles, Los Angeles, California 90095

Service Science, 2023, vol. 15, issue 4, 250-265

Abstract: How should digital service firms design and bundle their offering to capture a large market while seeking differentiation from competition? To answer this question, we consider the most generic model of competition, namely, two symmetric firms competing on price with regard to two (independent or complementary) components with an arbitrary distribution of valuations, without restrictions on their product offering. We show that three outcomes emerge in equilibrium, namely, a full-mixed bundling monopoly , a full-mixed bundling competitive duopoly leading to a price war, and a pure or partial-mixed bundling differentiated duopoly yielding positive profits for both firms. The latter equilibrium is the most plausible because it is the only one that is both trembling-hand perfect and not payoff dominated. We demonstrate the benefits of bundling under competition, thereby explaining the online platforms’ motivation for and success in expanding their offering horizontally. Yet not all products may be offered in equilibrium to avoid direct or indirect competition; hence, competition may lead to a narrower range of products available than a monopoly. Is bundling anticompetitive? It is a double-edged sword. On the one hand, it softens price competition by allowing firms to differentiate their offering. On the other hand, it stimulates competition by creating some product overlap.

Keywords: bundling; offer design; Bertrand competition; noncooperative game theory; online platforms (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/serv.2023.0325 (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:inm:orserv:v:15:y:2023:i:4:p:250-265

Access Statistics for this article

More articles in Service Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().