Abstract

This paper extends the standard model of bundling to allow products to be substitutes and for products to be supplied by separate sellers. Whether integrated or separate, …rms have an incentive to introduce bundling discounts when demand for the bundle is elastic relative to demand for stand-alone products. Separate …rms often have a unilateral incentive to o¤er inter-…rm bundle discounts, although this depends on the detailed form of substitutability. Bundle discounts mitigate the innate substitutability of products, which can relax competition between …rms and induce an integrated …rm to lower all of its prices when it follows a bundling strategy