Bundling in a Symmetric Bertrand Duopoly

Abstract

Competitive bundling may lead to such different outcomes as preempting entry, intensifying price competition, or softening it. These different outcomes have been shown to emerge under different industry structures when firms have restricted ranges of action. But how general are these results? In this paper, we investigate whether they still hold under the most generic model of competition, namely: Two symmetric firms competing on price with regard to two homogeneous zero-cost components, without restrictions on their product offering. We show that all three outcomes emerge in equilibrium, respectively as a full mixed-bundling monopoly, a full mixed-bundling competitive duopoly, and a pure or partial-mixed bundling differentiated duopoly. Furthermore, we establish that there are first-mover advantages to bundling and that, unlike in a monopoly, firms may be better off limiting their product offering. Our stylized approach highlights the importance of market operating rules for equilibrium selection: Bundling is not anticompetitive per se, unless firms attempt to coordinate or preempt entry by fully covering the market.