Mixed Bundling and Imperfect Competition

Daniel R. Vincent , Working paper , May 2014.

A model of two-product, Hotelling duopolists is examined in which  firms can engage in mixed bundling. Even though products are independent in consumption, bundled pricing induces complementarity across different products.  The most efficient outcome, symmetric independent goods pricing, is no longer an equilibrium when mixed bundling is feasible. On the other hand, inefficient pure bundling equilibria are robust to mixed bundling pricing because a pricing externality may prevent firms from independently achieving more attractive variety of consumer constructed bundles. Mixed bundle pricing equilibria typically exist as well. While these outcomes yield higher surplus than the pure bundling equilibria, they are still inefficient. Thus, if mergers of firms  increase the likelihood of mixed bundle pricing, these mergers can be harmful even if the firms do not initially compete. Blended market structures where two single product firms compete against a two-product firm are also examined and equilibria exist where a merger of the two single product firms can enhance both consumer welfare and total welfare.

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