erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Strategic Bundling in a Duopoly

Benan Zeki Orbay (Istanbul Technical University)
Hakan Orbay (Istanbul Technical University)

Abstract

The theoretical literature focuses on commodity bundling as a price discrimination method in monopolistic markets. The studies analysing bundling as a strategic behaviour of firms in oligopolistic markets are very few. Carbajo, De Meza and Seidmann (CMS) (1990) show that imperfect competition itself creates a strategic incentive for bundling. Their model considers a duopolistic environment where one of the firms is a monopoly in one good’s market and the other good produced by both firms. There is perfect positive correlation between the reservation prices of consumers who are uniformly distributed in a linear city. CMS (1990) shows that the firm which has monopolistic power in one good's market prefers bundling under certain conditions because bundling may create a less aggressive competition environment.

In this study, we consider an environment where consumers are uniformly distributed in a unit square city and coordinates represent the reservation prices of consumers for good A and good B. These goods are indivisible in consumption and each consumer buys no more than one of each good. Differing from existing literature, we assume that both goods are produced by both firms. In this environment, first, we analyse whether there is again a strategic motivation for bundling. Second, we explore whether it is possible to observe an outcome where one of the firms bundle and the other sell the goods separately.

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Middle East Technical University
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