Mixed Bundling and Mergers

Beginning with two Hotelling duopolies where demand for the product in each market is independent of demand for the product in the other, the paper examines the price, profit and welfare consequences that result when first one firm in a market merges with a firm in the other market creating a single two-product firm and then the remaining two firms merge – resulting in a duopoly of two-product firms. The paper demonstrates how to compute the equilibrium in each market structure. Assuming that firms cannot commit not to use all the pricing instruments at their disposal, mixed bundling by two-product firms emerges following each merger. While such behavior is a unilateral best response, the equilibrium consequences of these choices end up lowering total profits and welfare compared to the pre-merger markets suggesting that the opportunity to engage in mixed bundling cannot be the sole motivation for such mergers.