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Bundled Discounts by Independent Producers of Vertically Differentiated Goods

Duarte Brito and Helder Vasconcelos

Working paper, 2010

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Bundled discounts provide purchasers the opportunity to pay less for a bundle of products than the sum of the prices of the bundle¡¦s constituent products when purchased separately. Despite the fact that bundled discounts are a widespread business practice, the academic literature has devoted limited attention to this issue. There are several examples of bundled discounts in industries where, at least with respect to one of the products in the bundle, differentiation is clearly vertical. To the best of our knowledge, however, vertical differentiation has been neglected by the extant literature on bundled discounts.

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This paper studies the competitive effects of bundled discounts in a setting where the component goods are vertically differentiated and sold by otherwise unrelated firms. When firms decide simultaneously about their participation in a discounting scheme, in equilibrium, both pairs of firms offer bundled discounts and, relative to the no-bundling

benchmark: (i) all headline prices rise; (ii) all bundle prices, net of the discount, rise; and (iii) all firms earn higher profits. Furthermore, the equilibrium corresponds to the worst scenario in terms of consumer and social welfare, when compared to bundled discounts only offered by a single pair of firms or to the no-bundling benchmark.

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