We investigate how bundling affects investment in product quality, and derive welfare implications. A monopolist in a primary market competes with a rival in a complementary market. Bundling is the monopolist’s preferred strategy, since it either extracts surplus from the rival’s investment, or forces the rival to provide low quality. Bundling may reduce welfare without foreclosing the rival, but improves welfare when preventing undesirable investment. Since prohibiting bundling is not appropriate, we introduce a price test for bundled offers that preserves efficiencies from both bundling and quality investment, thereby improving welfare relative to the ‘do-nothing’ scenario. We consequently argue that this test should be applied whenever possible.
Bundling; Quality investment; Vertical differentiation; Price discrimination; Price test;
- L13: Oligopoly and Other Imperfect Markets
- L41: Monopolization • Horizontal Anticompetitive Practices
Alessandro Avenali, Anna D’Annunzio, and Pierfrancesco Reverberi, “Bundling, Competition and Quality Investment: A Welfare Analysis”, Review of Industrial Organization, vol. 43, n. 3, November 2013, pp. 221–241.
Review of Industrial Organization, vol. 43, n. 3, November 2013, pp. 221–241