On Bundling and Entry Deterrence
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On Bundling and Entry Deterrence Andrea Greppi1 · Domenico Menicucci2
© The Author(s) 2020
Abstract A multiproduct incumbent firm faces the threat of entry from another multiproduct (generalist) firm or from single-product (specialist) firms. Assuming that the incumbent offers higher quality products than its rivals, we inquire whether the possibility of bundling by the incumbent is more effective in deterring entry in one setting or the other, and explore how the quality difference affects the comparison. For instance, for relatively high-quality differences the generalist is more vulnerable to bundling than are the specialists; but bundling is a credible action for the incumbent more often against specialists than against the generalist. Keywords Competitive bundling · Entry deterrence · Vertical differentiation JEL Classification D43 · L13 · L41
1 Introduction At least since Whinston (1990) it is known that an incumbent multiproduct firm may use bundling in order to reduce an entrant’s profit—possibly below the entry cost— and thus build an entry barrier. This paper investigates how bundling is effective to deter entry, depending on whether the incumbent faces a single multiproduct rival or multiple single product rivals. In the proposed merger between GE and Honeywell, one argument of the European Commission against the merger was that the merged firm would have had more than half of market share in the markets for airplane engines and for avionics, and * Domenico Menicucci [email protected] Andrea Greppi [email protected] 1
Dipartimento di Scienze Economiche, Università degli Studi di Bologna, Piazza Scaravilli 2, 40126 Bologna, BO, Italy
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Dipartimento di Scienze per l’Economia e l’Impresa, Università degli Studi di Firenze, Via delle Pandette 32, 50127 Florence, FI, Italy
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could have used bundling to induce its rivals’ exit (see Nalebuff 2002).1 The merged entity would have competed with single-product firms, and we inquire whether a multiproduct opponent could better endure the effect of bundling; this also reveals whether single-product firms gain from merging. Choi (2008) addresses the same question, relative to mixed bundling, in a framework with symmetric firms that he uses to analyze the effect of the proposed merger between GE and Honeywell. Conversely, we assume vertical differentiation in the sense that the incumbent offers products with higher quality than its rivals’ products.2 We consider two games that differ because in one the incumbent faces an entry threat from a “generalist” multiproduct firm; in the other the entry threat comes from two “specialist” single product firms. After its rival(s) entry decision(s), the incumbent chooses whether to bundle or not its products; then price competition occurs. We compare the two games and determine when, as a function of the extent of vertical differentiation, the incumbent’s ability to bundle is more effective in deterring entry. About this, we notice that competition under
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