Welfare Analysis and Policy Implications of Bundling Decisions by Firms

Abstract

This paper models an original approach where the monopolist firm no longer uses pure bundling with weights 1:1. The decisions of the firm take place in a two-step optimisation process. In the first stage, using portfolio optimisation it decides whether to bundle and also sets the optimal weight for each good. In the second stage, it sets the profit maximising bundle price on the basis of the chosen weights. We compare the profit, consumer and welfare implications of our pure bundling model to the usual 1:1 pure bundling model, and comment on the competition policy making implications.