Buyer Power, Upstream Bundling, and Foreclosure

Abstract

This article provides a new rationale for the "leverage theory" of bundling in vertical markets. We analyze a framework with a capacity-constrained retailer and uncover that buyer power explains the emergence of bundling practices by a multi-product manufacturer to foreclose a more efficient upstream rival. We further show that the retailer may counteract this adverse effect by expanding its stocking capacity. Finally, we highlight that a ban on bundling practices may restore the retailer's incentives to restrict its stocking capacity which generates detrimental effects for welfare.