Capping Bundle Discounts: Two Regulatory Rationales

Abstract

Mixed-bundling of groceries and gasoline is common in a range of countries including Australia, the US, the UK, and parts of Europe. However, it has raised competition concerns. In Australia, the competition authority, fearing 'predation' and exit by independent gasoline retailers, has imposed a cap on such discounts. This paper develops an innovative extension to the standard Hotelling approach to consider bundled discounts when two conglomerates and an independent retailer compete over two independent products. We provide an economic foundation for the predatory concerns of bundle discounts and analyze optimal limitations on these discounts. We show that optimal regulatory intervention depends critically on both the objective of the regulator and the potential for exit, with optimal policies ranging from no intervention to a tight limit on discounts. In particular, we show that the Australian competition authority's intermediate price cap is consistent with either an attempt to raise the welfare of the worst off consumers (in the absence of exit) or overall consumer surplus (where the cap prevents exit).