PAYING FOR LOYALTY: PRODUCT BUNDLING IN OLIGOPOLY*

doi:10.1111/j.1467-6451.2006.00275.x

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Wiley InterScience

The Journal of Industrial Economics

Volume 54 Issue 1, Pages 43 - 62

Published Online: 15 Mar 2006

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PAYING FOR LOYALTY: PRODUCT BUNDLING IN OLIGOPOLY^*

JOSHUA S. GANS† and STEPHEN P. KING‡

†Melbourne Business School, University of Melbourne, 200 Leicester St., Carlton, Victoria, 3053, Australia j.gans@unimelb.edu.au
‡Australian Competition and Consumer Commission and the University of Melbourne, Melbourne, Victoria, 3010, Australia s.king@mbs.edu

^*We gratefully acknowledge the comments of Jody Evans, the editor and two anonymous referees, and seminar participants at the University of Melbourne and the Australian National University. Responsibility for all errors and views lies solely with the authors and not their affiliated organisations.

ABSTRACT

In recent times, pairs of retailers such as supermarket and retail gasoline chains have offered bundled discounts to customers who buy their respective product brands. These discounts are a fixed amount off the headline prices that allied brands continue to set independently. We show that a pair of firms can profit from offering a bundled discount to the detriment of other firms and consumers whose preferences are farther removed from the bundled brands. Indeed, when both pairs of firms negotiate bundling arrangements, there are no beneficiaries and consumers simply find themselves consuming a sub-optimal brand mix.

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/j.1467-6451.2006.00275.x About DOI