“Bundled Discounts by Independent Producers of Vertically Differentiated Goods”

Duarte Brito & Hélder Vasconcelos

Resumo WP n.º 38:

This paper studies the competitive effects of bundled discounts in a setting where the component goods are vertically differentiated and sold by otherwise unrelated firms. When firms decide simultaneously about their participation in a discounting scheme, in equilibrium, both pairs of firms offer bundled discounts and, relative to the no-bundling benchmark: (i) all headline prices rise; (ii) all bundle prices, net of the discount, rise; and (iii) all firms earn higher profits. Furthermore, the equilibrium corresponds to the worst scenario in terms of consumer and social welfare, when compared to bundled discounts only offered by a single pair of firms or to the no-bundling benchmark (Keywords: Bundled Discounts, Bilateral Bundling, Vertical Differentiation).


After the Introduction, in Section 2, we lay down our general framework and specify the timing of the proposed game. In Section 3, we study the competitive effects of both unilateral bundling by low quality producers and by high quality producers as well as bilateral bundling, relative to the benchmark case where there is no bundling. Section 4 studies what we term as the discounting game, a simultaneous move game where firms make decisions about their eventual participation in a bundled discount scheme. Section 5 investigates the robustness of the main results obtained when the assumption that consumer valuations over the two products are uncorrelated is relaxed. In particular, this section considers two polar cases of perfectly correlated valuations. Finally, Section 6 concludes the paper.

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