Bundles of trouble: Can competition law adapt to digital pricing innovation?

Abstract

The burgeoning digital economy is characterized by bundled offers of goods and services, many with near-zero marginal cost, in highly concentrated markets often exhibiting competition ‘for the market’ and ‘winner-takes-all’ outcomes. Acceptable competitive behaviour in these markets likely differs substantially from that in markets for goods with standard economic characteristics. The suitability of current tools used to specify and enforce competition laws for governing commercial activity in a digital economy dominated by bundled offers is questionable. Classical market analysis focuses narrowly on individual product markets. In bundle product markets, quantitative econometric analysis becomes computationally intractable as the own- and cross-elasticities increase exponentially with the number of products in the bundle and providers in the market. Furthermore, classic econometric analysis cannot inform decisions in markets where bundles are yet to be offered. Simulation and numerical analysis of hypothetical scenarios under different consumer preferences and firm strategic choices offers another means of evaluating effects of intervention in specific circumstances. We illustrate using a model based on the (declined) proposed New Zealand merger between Sky Television and Vodafone and make recommendations for both theory and practice as to how simulation analysis can be used to complement more conventional competition analyses.