Dominance and Competitive Bundling

Sjaak Hurkens, Doh-Shin Jeon and Domenico Menicucci

Abstract: We study how bundling affects competition between two asymmetric multi-product firms. One firm dominates the other in that it produces better products more efficiently. For low (high) levels of dominance, bundling intensifies (relaxes) price competition and lowers (raises) both firmsí profits. For intermediate dominance levels, bundling increases the dominant firmís market share substantially, thereby raising its profit while reducing its rivalís profit. Hence, the threat to bundle is then a credible foreclosure strategy. We also identify circumstances in which a firm that dominates only in some markets can profitably leverage its dominance to other markets by tying all its products.

Key Words: Bundling; Tying; Leverage; Dominance; Entry Barrier.

Classification Number:   D43; L13; L41

American Economic Journal: Microeconomics Forthcoming