Competitive Mixed Bundling and Consumer Surplus

Mixed bundling in imperfectly competitive industries causes some prices to rise and others to fall. This paper studies under what conditions mixed bundling works for or against the consumer interest. We find that if buyers incur firm specific costs or have shop specific tastes then competitive mixed bundling lowers consumer surplus overall and raises profits- the same is true of competitive volume discounts. Competition without these discounts causes all prices to be kept low as larger customers are targeted; with discounts the prices for heavy users drop, but more is extracted from small users. The consumer surplus result is reversed if the differentiation between components as opposed to firms is key. Keywords bundling; loyalty rebates; volume discounts; competitive price discriminatio