Chun-Hsiung Liao and Yair Tauman

"The role of bundling in price competition"
JEL codes: C72, D21, D41, D43, L13.

Abstract: We focus on price competition between several multiproduct firms which produce differentiated systems, each consisting of two complementary products. Firms offer their products separately and/or as a bundle. Consumers are homogeneous but assign different values to different systems. We find that equilibrium always exists (unlike the case where bundling strategies are excluded), and consumers purchase socially best systems. Consumers extract the entire surplus unless a firm produces at least one of the components of every socially best system. We show that bundling may increase consumer surplus. A sufficient condition for a system to be sold as a bundle at a discount price is provided.