Abstract
We consider a multiproduct incumbent which monopolizes one market but faces a potential entrant in another market. In a two dimensional Hotelling model, when consumers’ reservation value is relatively high, we show that the incumbent has an incentive to use bundling to deter entry only if a prior commitment is applicable. However, when consumers’ reservation value is low, the multiproduct firm even has no incentive to use bundling and bundling has no effect on entry deterrence.
Highlights
Suppose a multiproduct incumbent monopolizes one market but faces a potential entrant in another market
We can find the critical point where buying AA is indifferent from buying B2 for it to analyze the effect of bundling to deter entry by considering consumers’ reservation value and this makes the result differ from the previous research
We show that when consumers’ reservation value is low, the incumbent even has no incentive to deter entry by using bundling because the profit, if the entry happened under independent pricing, is even higher than it is in a monopoly bundling market
Summary
Suppose a multiproduct incumbent monopolizes one market but faces a potential entrant in another market. Nalebuff (2004) showed that in a modified Hotelling model, if the incumbent chooses prices before the entrant, it could deter entry by bundling even without any commitment [2]. A product may be very welcomed consumers’ reservation value is very high and consumers are willing to pay high price. (2015) Bundling and Consumers’ Reservation Value: Effects on Market Entry. Matutes and Regibeau (1988) examined the incentive of pure bundling for two symmetric, multiproduct firms by building a two-dimensional Hotelling unit square [4]. They found that pure bundling selling strategies were always dominated by independent pricing strategy, regardless of the level of consumers’ reservation value.
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