Monday, January 7, 2013
Posted by D. Daniel Sokol
Jong-Hee Hahn (school of economics, Yonsei Uneversity) and Sang-Hyun Kim (Department of Economics, Michigan State University) discuss Interfirm Bundled Discounts in Oligopolies.
ABSTRACT: This paper shows that firms producing homogeneous goods (e.g. Bertrand competitors) can achieve supernormal profits using interfirm bundled discounts, which connect their product with a specific brand of other firm with market power. By committing to a price discount exclusively to buyers of a particular brand of another good, the firms create a sort of artificial switching costs and attain a semi-collusive outcome. In fact, the discount scheme allows the firms with no market power to avoid Bertrand trap by leveraging other firms' market power. Consumers are worse off due to higher prices under bundled discounts.