Monday, February 10, 2020
Claire Chambolle, Ecole Polytechnique, Paris - Laboratoire d'Econometrie; National Institute for Agricultural Research (INRA) and Hugo Molina, French National Institute for Agricultural Research (INRA) identify Buyer Power, Upstream Bundling, and Foreclosure.
ABSTRACT: This article provides a new rationale for the "leverage theory" of bundling in vertical markets. We analyze a framework with a capacity-constrained retailer and uncover that buyer power explains the emergence of bundling practices by a multi-product manufacturer to foreclose a more efficient upstream rival. We further show that the retailer may counteract this adverse effect by expanding its stocking capacity and distribute all products to consumers. Finally, our theory highlights that a ban on bundling practices may restore the retailer's incentives to restrict its stocking capacity which generates detrimental effects for welfare.