Expand analysis of the bundling model on firm profits and social welfare

Abstract

Generally, bundling can reduce the profits of non-bundling competitor(s) and social welfare. The assumptions usually include the fixed bundling coefficient and the invariable degree of product relevance, but seldom include governmental regulations. Based on the Stephen Martin’s model, this paper uses MATLAB to study the effects of pure bundling on social welfare and firm profits under the circumstances that the bundling coefficient and the degree of product relevance are variable. It is found that when the value of two products in the bundle is independent, social welfare can be increased only by changing the proportion of two products, but this requires the government to specify the bundling coefficient. To study the second problem, we consider the path of equilibrium profits of two firms. The results show that when the two products in the bundle are in a certain relationship, a firm's bundling may even increase the profits of the non-bundling competitor. But the firm is not bound to bundle its products at this time, because it will gain more profits by selling separately. Therefore, in the duopoly market of free competition, bundling will always make the non-bundling firm suffers a lot. But when the government intervenes, the conclusions may be opposite. The government does not need to completely ban the bundling, but it should be properly regulated.