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Bundling
and Endogenous Product Differentiation |
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This paper follows the
model setting of Martin (1999) and Lin and Saggi (2002) to construct a
three-stage game model of two-firm, two-type products. We further takes into account product innovation competition in
competing good market, in order to consider the bundling effects on product
innovation, firms¡¦ profit, consumer surplus, and welfare. We find that Bundling
increases both firms¡¦ product innovations when the degree of product
differentiation of competing good is lower than an
approximation of one-half. Instead, when the degree of substitutability of
competing good is larger than the critical value the
bundling still increase rival firm¡¦s product innovation but decreases its own
product innovation level. If the initial value of degree of product
differentiation is greater than 0.5, then bundling is the dominant strategy
for firm A. When both firms engage product innovation competition, bundling
may increase the rival¡¦s profit and welfare, and increases consumer surplus. |