Compatibility and Bundling with Generalist and Specialist Firms

Abstract

I analyze compatibility and bundling choices when one generalist firm offering both components of a system competes against two specialist firms each supplying one component only (but not the same one). I show that the generalist firm may have an incentive to choose incompatibility or engage in pure bundling when one component is less differentiated than the other. In this case, the system is more differentiated than the relatively undifferentiated component, and so under incompatibility the specialist firm that produces the undifferentiated component will relax price competition. This may result in higher profits for some of the competing firms.

The Strategic Effect of Bundling: A New Perspective

“…These results are in line with Denicolò (2000), who shows that: (i) pure bundling can be profitable for the multiproduct/generalist firm when product substitutability across components increases and that (ii) the specialist/single-product firm may lose under bundling. However, in my model I can represent the situation in which the two goods do not have to be combined together for a 'system' to function; additionally, using my approach it is possible to capture the interaction between product substitutability and product complementarity in driving the decision to bundle for the multi-product firm.…”

“…13 Numerical and graphical simulations confirm that γ 5 ∈ (−δ, 1), i.e. it belongs to the area where bundling is selected at equilibrium.…”

“…Farrell, Monroe and Saloner (1998), on the contrary, demonstrate that firms may prefer incompatibility with cost heterogeneity in presence of at least three different varieties of each component. Denicolò (2000) analyzes compatibility and bundling choices when one generalist firm offers both components of a system and competes against two specialist firms each supplying only one component. He shows that incompatibility or pure bundling may be profitable for the generalist firm when one component is less differentiated than the other.…”

Mix-and-Match Compatibility in Asymmetric System Markets

“…In our model, incompatibility (exclusive alliances) is used as a semicollusive device rather than a foreclosing device, and so it is more closely related to the facilitating-device story where bundling relaxes competition by allowing competing firms to better differentiate themselves (see Carbajo, De Meza, and Seidman, 1990;Seidman, 1991;Chen, 1997;and Denicolo, 2000). 16 This line of research usually examines the case where only one firm bundles and the other sells only one component, while we consider cases where all firms are active in equilibrium, selling their components or systems.…”

Multiproduct Pricing in Oligopoly

“…3 Consumer heterogeneity in preferences is a standard assumption in the multiproduct literature (see Whinston (1990), Chen (1997), Choi and Stefanadis (2001), Hosken and Reiffen (2007) and Denicolò (2000) among others). mixed purchases.…”