A theory of commodity bundling in final product markets: Professor Hirshleifer meets Professor Becker

Abstract

This article advances a theory of commodity bundling as an alternative to forward integration in household production. We argue, in particular, that a producer having market power over the sale of a final consumption good will sometimes find it profitable to bundle that good with one or more complements – and to sell the preassembled package to consumers at a lump-sum price – for the same reason that a monopolist of an intermediate input profits from vertically integrating his supply chain. In both cases, substitution against a monopoly-priced input is avoided and competitively determined input-price ratios are restored downstream. Combining the theories of transfer pricing and household production also suggests that the not uncommon practice of “mixed bundling”, whereby sellers offer the same final consumption good both bundled and unbundled, can be explained as a way of segmenting consumers into groups based on differences in their skills, tastes, and preferences for home production.