Product offering complexity: implications for tying doctrine
Files
First author draft
Date
2023
Authors
Salinger, Michael A.
Version
First author draft
OA Version
Citation
M.A. Salinger. "Product Offering Complexity: Implications for Tying Doctrine" SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4605247
Abstract
Firms with multiple products that they can sell either separately or in bundles cannot, as a practical matter, offer every possible combination. I analyze bundling and tying by a firm that sells two products that it can sell individually and/or bundled. To capture the limiting factor on the number of distinct products, I assume a fixed product offering cost, with the individual items and the bundle each being a distinct product. The primary competitive constraint on the firm is the threat of entry. Potential entrants can be as efficient (no entry barriers) or less efficient (some entry barriers) than the incumbent. The model also allows for a potential entrant that is more efficient in the production of one of the two products. Pure bundling, which entails tying, can occur for two distinct reasons. One (exemplified by selling shoes in pairs) is that most people want both items and there are efficiencies in selling them as a bundle. The other (exemplified by newspapers) is that when the fixed cost of a product offering is high, a bundled product can meet the needs of a diverse set of customer preferences with a single offering. Mixed bundling permits each customer to buy exactly what she wants, but possibly at high prices. While pure bundling can appear to “force” customers to buy an item they do not want, the threat of entry by a firm selling individual goods restricts the price. In some cases, pure bundling makes all consumers better off. In others, customers who want just one of the items might pay more than they would if the seller offered the items separately; but those who want both items pay less, and aggregate consumer surplus is higher.