Tuesday, April 28, 2015
James D. Dana Jr., Northeastern University - Department of Economics; Northeastern University - Department of International Business and Strategy; Harvard Business School and Kathryn E. Spier, Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER) ask Do Tying, Bundling, and Other Purchase Restraints Increase Product Quality? Worth downloading!
ABSTRACT: Tying, bundling, minimum purchase requirements, loyalty discounts, exclusive dealing, and other purchase restraints can create stronger incentives for firms to invest in product quality. In our first example, the firm sells a durable experience good and a complementary non-durable good to a representative consumer. Tying shifts profits from the durable to the non-durable good, making profits more sensitive to the consumer's experience. In our second example, the firm sells a single experience good to consumers with heterogeneous demands. Minimum purchase requirements screen out the low-volume consumers who would otherwise free ride on the superior monitoring of the high-volume consumers. The examples illustrate that purchase restraints can increase both firm profits and consumer surplus by making firm profits more sensitive to consumer experience, either directly by giving the consumer more control over the stream of profits or indirectly by constraining consumers to monitor more intensively.