Service bundling and strategic equilibrium in the information services industry

The information service industry is characterized by successive levels of access; e.g., network service and data base service. Within this structure firms may have incentives to bundle services and exclude independent service providers from media access. This multilevel structure is incorporated into mathematical models that can be used to characterize interactions between unregulated firms in a variety of industries, including switched network services, software, and television.Incentives for vertical merger between complementary service providers are evaluated for several cases. We show that cross subsidy occurs under vertical merger, and that the likelihood of merger is greatest when one of the firms can unilaterally exclude other complementary firms from media access. In this case the access controlling firm is in a position to enforce bundled pricing and limit the availability of independently supplied services. This ability to bundle services leads to cross subsidy and merger, even in the absence of economies of scale or scope.