Is Bundling Anticompetitive?

I analyze the implications of bundling on price competition in a market for complementary products. Using a model of imperfect competition with product differentiation, I identify the incentives to bundle for two types of demand functions and study how they change with the size of the bundle. With an inelastic demand, bundling creates an advantage over uncoordinated rivals who cannot improve by bundling. I show that this no longer holds with an elastic demand. The incentives to bundle are stronger and the market outcome is symmetric bundling, the most competitive one. Profits are lowest and consumer surplus is maximized.bundling, complementary goods, product differentiation