Interfirm Bundling and Vertical Product Differentiation |
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Authors: | Duarte Brito Helder Vasconcelos |
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Institution: | 1. New University of Lisbon, 2829‐516 Caparica, PortugalFaculdade de Ciências e Tecnologia, Universidade Nova de Lisboa and CEFAGE‐UE.;2. University of Porto, 4200‐464 Porto, PortugalCEF.UP and CEPR. |
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Abstract: | In this paper, we study the competitive effects of bundled discounts offered by pairs of independent firms. In a setting with vertically differentiated goods, where firms decide whether to participate in a discounting scheme before prices are set, it is shown that, in equilibrium, all pairs of firms producing goods of the same quality level offer bundled discounts. Relative to the no‐bundling benchmark, we find that (i) all headline prices rise, (ii) all bundle prices, net of the respective discount, decrease, and (iii) only high‐quality sellers will obtain higher profits. Furthermore, this equilibrium corresponds to the worst scenario in terms of consumer welfare, and it and decreases social welfare. |
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Keywords: | Bilateral bundling bundled discounts vertical differentiation D43 L13 L41 |
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