Bundling strategy in base-supplemental goods markets: the case of Microsoft

We show that bundling is the optimal pricing strategy for a base good monopolist who also supplies a supplemental good under zero marginal cost of product. Without the exit of the rival firm, bundling is a profitable strategy because it increases the profits in the base good market. We show that bundling lowers social welfare as well as rival firms' profit if the supplemental goods are close substitutes. Otherwise, bundling may actually generate welfare enhancements. Our analysis applies directly to the computer software markets and the case of Microsoft.