DOES ECONOMICS PROVIDE A RELIABLE GUIDE TO REGULATING COMMODITY BUNDLING BY FIRMS? A SURVEY OF THE ECONOMIC LITERATURE

Bruce H. Kobayashi

Journal of Competition Law and Economics, 2005, vol. 1, issue 4, 707-746

Abstract: This article surveys the voluminous economic literature on commodity bundling. While bundling has been widely studied, the vast majority of the literature has focused on theoretical treatments of bundling that demonstrate a wide range of reasons why firms might engage in bundling. These papers generally contain restrictive assumptions, including assumptions regarding the existence of monopoly in some markets, and the nature of rivalry in others. The models contained in these papers also generally suppress the more obvious and ubiquitous reasons firms may use bundling. Moreover, these models have not been subject to robustness checks, nor have their assumptions been tested empirically. This review of the economic literature generally confirms the US Solicitor General's view in 3M v. LePage's regarding the underdeveloped state of the economics literature and its position that the US Supreme Court should defer promulgation of antitrust standards for bundling. While the literature has demonstrated the possibility that bundling can generate anticompetitive harm, it does not provide a reliable way to gauge whether the potential for harm would outweigh any demonstrable benefits from the practice. As a result, the widespread application of the antitrust laws to bundling by firms can generate significant error costs by erroneously condemning or deterring efficient business practices. In the future, economists should seek to expand their understanding of both the anticompetitive and procompetitive reasons firms engage in bundling. This will entail studying the reasons why bundling is adopted by firms without market power, relaxing the assumption of monopoly in theoretical models, and generating testable hypotheses and the data to test them.

Date: 2005
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Citations: View citations in EconPapers (27)

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