Bundling
- So far in this course, with the exception of predatory pricing, the courts have ruled that most low prices are considered competitive
- An interesting instance where discounts can be anticompetitive is in bundled discounts
- Consider the case of LePage Inc. v. 3M (2004)
- 3M and LePage were competitors in the market for tape
- As LePage’s market share grew, 3M started to bundle its tape with other unrelated products at a bundled discount (e.g. health care, auto care, etc.)
- The bundle discount incentivized retailers to carry 3M tape products over LePage’s
- Supreme Court: ``The defendant bears the burden of persuading the jury that its conduct was justified by any normal business purpose”
Anticompetitive Bundling Example
Consider a firm (A) that bundles the following three products:
| Price | Cost | |
|---|---|---|
| Pencils | $4.00 | $2.00 |
| Soap | $6.00 | $4.00 |
| Keys | $5.00 | $2.00 |
- Suppose a retailer sells all three products, and if the retailer buys 1,000 of each good, then the firm offers a 25% discount
- TE stands for Total Expenditure \[ TE = 0.75(4, 000 + 6, 000 + 5, 000) = \$11, 250 \]
- Suppose there exists another producer (B) of soap that can produce it at a cost of $3.00 \[ TE = 4, 000 + 3, 000 + 5, 000 = \$12, 000 \]
- Thus, the bundle excluded an efficient firm from the market
Consider another example that bundles the following three products:
| Price | Cost | |
|---|---|---|
| Toothpaste | $4.00 | $2.00 |
| Mustard | $3.00 | $2.00 |
| Bleach | $5.00 | $3.00 |
- Suppose that the store needs 1000 units of each product
- If the supplier A offers 20% discount for the bundle, the retailer’s total expenditures will be
\[ TE= 0.8(4000+3000+5000)=9600 \]
Suppose a rival bleach supplier wants to sell 1000 units to the store
Without the bundle and bleach supplied by another supplier, total expenditures of the retailer for the toothpaste and mustard will be \[ TE=4000+3000 = 7000 \]
To compete with the bundled product, the rival bleach supplier could charge no more than $2600, or $2.6 per unit
If the rival bleach supplier was equally efficient as firm A, the marginal cost of production would be $3.00
The equally efficient rival bleach supplier could be excluded as the maximum price that it could charge is below its cost
Multiproduct firm could raise price as a result of bundling the discounts
- The specialty producers cannot compete because their sales will be unprofitable
- If the products in a bundle were to sold separately with 20percent discount spread evenly across each product, it would mean $3.20, $2.40, $4.00 for the three products
- In that case the specialty producers can be profitable