Inter-…rm Bundling and Vertical Product Dierentiation

This paper studies the competitive eects of bundled discounts oered by pairs of inde- pendent …rms. In a setting with vertically dierentiated goods where …rms decide whether to participate in a discounting scheme before prices are set, it is shown that, in equilib- rium, all pairs of …rms producing goods of the same quality level oer bundled discounts and, relative to the no-bundling benchmark: (i) all headline prices rise; (ii) all bundle prices, net of the respective discount, decrease; and (iii) only high quality sellers will obtain higher pro…ts. Furthermore, this equilibrium corresponds to the worst scenario in terms of consumers'welfare and decreases social welfare.

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