Bundling as an Entry Barrier

Abstract

In this paper we look at the case for bundling in an oligopolistic environment. We show that bundling is a particularly effective entry-deterrent strategy. A company that has market power in two goods, A and B, can, by bundling them together, make it harder for a rival with only one of these goods to enter the market. Bundling allows an incumbent to credibly defend both products without having to price low in each. The traditional explanation for bundling that economists have given is that it serves as an effective tool of price discrimination by a monopolist. Although price discrimination provides a reason to bundle, the gains are small compared with the gains from the entry-deterrent effect. I. INTRODUCTION In this paper we look at the case for bundling in an oligopolistic environment. We show that bundling is a particularly effective entry-deterrent strategy. A company that has market power in two goods, A and B, can, by bundling them together, make it harder for a rival with only one of these goods to enter the market. Bundling allows an incumbent to defend both products without having to price low in each. While it is still possible to compete by offering a rival bundle, a monopolist can significantly lower the potential profits of a one-product entrant without having to engage in limit pricing prior to entry. We also show that bundling continues to be an effective pricing tool even if entry deterrence fails (or if there is already an existing one-product rival). A company with a monopoly in product A and a duopoly in product B makes higher profits by selling an A‐B bundle than by selling A and B independently. Leveraging market power from A into B and accepting some one-product competition against the bundle is better than using the monopoly power in good A all by itself. Since bundling mitigates the impact of competition on the incumbent, an entrant can expect the bundling strategy to persist, even without any commitment. The traditional explanation for bundling that economists have given is that it serves as an effective tool of price discrimination by a monopolist (see Stigler [1968], Adams and Yellen