On individual incentives to bundle in oligopoly

This paper examines competition in an oligopoly with multiproduct firms when some firms bundle but other firms sell their products separately, whereas the existing literature on competitive bundling focuses on the extreme cases of competition among bundles or among individual products. Our analysis reveals each firm’s individual incentive to bundle, and allows to study a two-stage game in which first each firm chooses its pricing strategy (bundling or independent pricing), then price competition occurs given the price regime each firm has selected at stage one. When firms are ex ante symmetric, we find that bundling is weakly dominated by independent pricing. In a setting in which a firm’s products have higher quality than its rivals’ products, individual incentives to bundle emerge (eventually for all firms) if the quality difference is large.