Upstream Bundling and Leverage of Market Power

Abstract

We present a novel rationale for bundling in vertical relations. In many markets, upstream firms compete to be in the best downstream slots (e.g., the best shelf in a retail store or the default application on a platform). If a multiproduct upstream firm faces competition for a subset of its products, we show that tying the monopolised product with the competitive ones can reduce upstream rivals’ willingness to offer slotting fees to retailers. This strategy does not rely on entry deterrence and can be achieved through contractual or even virtual tying. The model is particularly relevant to the Google-Android case.

Tying in two‐sided markets with heterogeneous advertising revenues and negative pricing

“…In this sense, our theory is closer to the EC's view on the case. Our theory also differs from that suggested by de Cornière and Taylor (2021) in which the purpose of tying is to ease rebate competition for device manufacturers.…”

“…Here, imperfect rent extraction occurs in the tying-good market, whereas in ours and Choi and Jeon's model, the target of the rent extraction is the extra revenue created in the tied-good market. de Cornière and Taylor (2021) analyze bundling incentives in a vertical market in which positive wholesale markups are induced by contractual frictions. In this setup, a tying-good monopolist upstream may have an incentive to bundle its products to reduce the tied-good rival's willingness to offer slotting fees to the downstream firm, thereby capturing more of the industry profit.…”

Anticompetitive Bundling When Buyers Compete

“…9 See Matutes and Regibeau (1988) for an early analysis of competitive bundling in duopoly, and Zhou (2017) for a recent general treatment. may prevent the dominant firm from extracting enough surplus using independent pricing, and that tying can be a way to circumvent these frictions (Greenlee, Reitman and Sibley, 2008;Choi and Jeon, 2021;de Cornière and Taylor, 2021;Chambolle and Molina, forthcoming). Our paper can be understood as belonging to this last literature insofar as we rule-out public contracts.…”

“…Other papers have proposed theories of harm that could apply in these cases, and that do not rely on downstream competition (e.g. Carlton and Waldman, 2002;de Cornière and Taylor, 2021;Choi and Jeon, 2021).…”

Data‐enabled learning, network effects, and competitive advantage

“…(2019) provides a high‐level discussion of the different ways firms can enjoy incumbency advantages, including access to more data: they note that across‐user learning and within‐user learning are two distinct ways in which data generates a competitive advantage for incumbents. De Cornière and Taylor (2021) also study the effect of data on competition but focus on showing how different uses of data (including improving a firm's product, but also ad targeting and price discrimination) determine whether data is pro‐ or anticompetitive. Although their framework is much more general in other ways, they do not analyze a fully dynamic setting in which data learning can accumulate.…”