Complementing Substitutes: Bundling, Compatibility, and Entry

Posted by D. Daniel Sokol

Emanuela Carbonara, University of Bologna - Department of Economics, Giuseppe Dari-Mattiacci, University of Amsterdam - Amsterdam Center for Law and Economics (ACLE),
Francesco Parisi, University of Minnesota - Law School, and Matteo Alvisi, University of Bologna - Department of Economics write on Complementing Substitutes: Bundling, Compatibility, and Entry.

ABSTRACT: In this paper we study price competition, equilibrium market configurations and entry when firms compete in vertically-di¤erentiated markets producing complementary goods. We consider two complements and start from a con…guration where the market for one complement is a duopoly, whereas the other is a monopoly. In such framework, when products are highly di¤erentiated, the low-quality duopolist is always pushed out. We then allow for competition between complements on both sides of the market: one of the duopolists starts to produce also the other complement and decides whether to offer its two products as a bundle or to allow consumers to combine them with complements from other producers. We prove that this strategy always allows the low-quality duopolist to stay in the market, no matter if the duopolist producing both complements is the high or the low-quality one. Moreover, this strategy always increases consumer surplus, even when the duopolist sells the two complements only as a bundle.