Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Thursday, February 13, 2020

The Impact of Product Qualities on Downstream Bundling in a Distribution Channel

By: Angelika Endres (Paderborn University); Joachim Heinzel (Paderborn University)
Abstract: We study the impact of exogenous product qualities on a downstream firm’s decision to bundle and the welfare effects of downstream bundling. We consider a distribution channel with two downstream firms and two price-setting monopolistic upstream producers. One upstream firm sells its good 1 exclusively to one downstream firm and the other upstream firm sells its good 2 to both downstream firms. The downstream firms compete in prices and the two-product downstream firm has the option to bundle its goods. We find that downstream bundling aggravates the problem of double marginalization in the channel, but reduces the intensity of downstream competition. Finally, bundling is profitable for the two-product downstream firm only when the quality of good 2 exceeds the quality of good 1. However, bundling is always profitable when the production process is controlled by the downstream industry. The impact on total welfare is ambiguous and depends on the distribution of market power in the channel and the quality levels of the goods.

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