Bundling by Competitors and the Sharing of Profits

CORE Discussion Paper No. 2005/7

27 Pages Posted: 23 Feb 2006

See all articles by Victor A. Ginsburgh

Victor A. Ginsburgh

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES)

Israel Zang

Recanati School of Management

Date Written: February 2005

Abstract

We discuss the welfare effects of bundling two products offered by two symmetric firms. We first show that, in terms of welfare, a monopoly does better than a duopoly in which each firm sell its good and that a monopoly selling the bundle does better than if it sells the bundle and the two goods separately. We also show that the choice of the mechanism for sharing the profits, obtained from the sales of the bundle, might have dramatic positive or negative effects - even when the various optional mechanisms yield equal splits. In particular, the use of the Shapley value yields the highest total and consumer surpluses and the lowest producer surplus, while the weighted Shapley value totally reverses the outcome and yields profits which are very close (over 99%) to the full monopoly profits. Hence, as in the case of bundling by a monopolist, when competitors bundle they assist each other in deterring entry. However, in addition when competitors bundle, they can implicitly cooperate via the setting of the profit sharing rule and increase their profits at the expense of customers. This issue calls for some further attention by regulators.

Keywords: Bundling, Shapley Value, Weighted Shapley Value, Sharing of Profits

JEL Classification: L13, L51

Suggested Citation

Ginsburgh, Victor A. and Zang, Israel, Bundling by Competitors and the Sharing of Profits (February 2005). CORE Discussion Paper No. 2005/7, Available at SSRN: https://ssrn.com/abstract=884373 or http://dx.doi.org/10.2139/ssrn.884373

Victor A. Ginsburgh (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
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Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

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Belgium
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Israel Zang

Recanati School of Management ( email )

Tel Aviv Univesity
Ramat Aviv, Tel Aviv, 69978, 69978
Israel
972-3-640-8508 (Phone)
972-3-640-7803 (Fax)