IDEAS home Printed from https://ideas.repec.org/a/bpj/bejeap/v12y2012i1n12.html
   My bibliography  Save this article

Smaller Pie, Larger Slice: How Bargaining Power Affects the Decision to Bundle

Author

Listed:
  • Adilov Nodir

    (Indiana University - Purdue University Fort Wayne)

  • Alexander Peter

    (U.S. Federal Communications Commission)

  • Cunningham Brendan M.

    (U.S. Naval Academy)

Abstract

A cable operator chooses to bundle or provide programs a la carte by striking a balance between maximizing total surplus and minimizing transfer payments to program providers. Using general demand and cost functions, we show that a cable operator's decision to bundle maximizes total producer surplus if the cable operator's bargaining power is sufficiently high, and that a cable operator in a weak bargaining position might strategically choose to unbundle viewer channels in order to enhance its bargaining position with individual program suppliers, even when this decision reduces total surplus. It is, therefore, plausible that regulations to cap market share or impose a la carte on cable operators may reduce total surplus, and absent offsetting increases in consumer welfare, such policy measures may reduce total welfare. Under more restrictive conditions, we extend the analysis and show that consumer and social welfare under bundling or a la carte depends on both bargaining power and advertising rates. Our results imply a monopolist does not necessarily increase deadweight loss, and under certain circumstances a monopolist's bargaining outcomes yield higher social welfare.

Suggested Citation

  • Adilov Nodir & Alexander Peter & Cunningham Brendan M., 2012. "Smaller Pie, Larger Slice: How Bargaining Power Affects the Decision to Bundle," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-25, April.
  • Handle: RePEc:bpj:bejeap:v:12:y:2012:i:1:n:12
    DOI: 10.1515/1935-1682.2733
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/1935-1682.2733
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.

    File URL: https://libkey.io/10.1515/1935-1682.2733?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Chenghuan Sean Chu, 2010. "The effect of satellite entry on cable television prices and product quality," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 730-764, December.
    2. Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," The Journal of Business, University of Chicago Press, vol. 57(1), pages 211-230, January.
    3. Daniel P. O'Brien & Greg Shaffer, 2005. "Bargining, Bundling, and Clout: The Portfolio Effects of Horizontal Mergers," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 573-595, Autumn.
    4. R. Preston McAfee & John McMillan & Michael D. Whinston, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 371-383.
    5. Salinger, Michael A, 1995. "A Graphical Analysis of Bundling," The Journal of Business, University of Chicago Press, vol. 68(1), pages 85-98, January.
    6. Gul, Faruk, 1989. "Bargaining Foundations of Shapley Value," Econometrica, Econometric Society, vol. 57(1), pages 81-95, January.
    7. William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(3), pages 475-498.
    8. Barry Nalebuff, 2004. "Bundling as an Entry Barrier," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 159-187.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Matsushima, Noriaki & Shinohara, Ryusuke, 2014. "What factors determine the number of trading partners?," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 428-441.
    2. Howell, Bronwyn E & Potgieter, Petrus H., 2017. "Competition and vertical/agglomeration effects in media mergers: bagging bundle benefits," 14th ITS Asia-Pacific Regional Conference, Kyoto 2017: Mapping ICT into Transformation for the Next Information Society 168487, International Telecommunications Society (ITS).
    3. Howell, Bronwyn E. & Potgieter, Petrus H., 2017. "Triple-play (un)bundled pricing – cui bono?," 28th European Regional ITS Conference, Passau 2017 169466, International Telecommunications Society (ITS).
    4. Howell, Bronwyn E. & Potgieter, Petrus H., 2019. "Bagging bundle benefits in broadband and media mergers: Lessons from Sky/Vodafone for antitrust analysis," Telecommunications Policy, Elsevier, vol. 43(2), pages 128-139.
    5. Hwanho Choi, 2018. "Broadcasting and Telecommunications Industries in the Convergence Age: Toward a Sustainable Public-Centric Public Interest," Sustainability, MDPI, vol. 10(2), pages 1-15, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Crawford, Gregory S. & Cullen, Joseph, 2007. "Bundling, product choice, and efficiency: Should cable television networks be offered a la carte?," Information Economics and Policy, Elsevier, vol. 19(3-4), pages 379-404, October.
    2. Gayer, Amit & Shy, Oz, 2016. "A welfare evaluation of tying strategies," Research in Economics, Elsevier, vol. 70(4), pages 623-637.
    3. Stephanie Lee, 2017. "Does Bundling Decrease the Probability of Switching Telecommunications Service Providers?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 50(3), pages 303-322, May.
    4. Bartelt, Nadja, 2018. "Bundling in Internetmärkten: Ökonomische Besonderheiten, Wettbewerbseffekte und Regulierungsimplikationen," Ilmenau Economics Discussion Papers 120, Ilmenau University of Technology, Institute of Economics.
    5. Kopczewski, Tomasz & Sobolewski, Maciej & Miernik, Ireneusz, 2018. "Bundling or unbundling? Integrated simulation model of optimal pricing strategies," International Journal of Production Economics, Elsevier, vol. 204(C), pages 328-345.
    6. Chakravarty, A. & Mild, A. & Taudes, A., 2013. "Bundling decisions in supply chains," European Journal of Operational Research, Elsevier, vol. 231(3), pages 617-630.
    7. Takanori Adachi & Takeshi Ebina & Makoto Hanazono, 2017. "Endogenous Product Boundary," Manchester School, University of Manchester, vol. 85(1), pages 13-40, January.
    8. Qianbo Yin & Kwei‐Long Huang & Chia‐Wei Kuo & Sean X. Zhou, 2021. "Add‐On Pricing in a Distribution Channel," Production and Operations Management, Production and Operations Management Society, vol. 30(11), pages 4069-4088, November.
    9. Neil Gandal & Sarit Markovich & Michael H. Riordan, 2018. "Ain't it “suite”? Bundling in the PC office software market," Strategic Management Journal, Wiley Blackwell, vol. 39(8), pages 2120-2151, August.
    10. Gregory Crawford, 2008. "The discriminatory incentives to bundle in the cable television industry," Quantitative Marketing and Economics (QME), Springer, vol. 6(1), pages 41-78, March.
    11. Ashutosh Prasad & R. Venkatesh & Vijay Mahajan, 2010. "Optimal Bundling of Technological Products with Network Externality," Management Science, INFORMS, vol. 56(12), pages 2224-2236, December.
    12. Vaubourg, Anne-Gael, 2006. "Differentiation and discrimination in a duopoly with two bundles," International Journal of Industrial Organization, Elsevier, vol. 24(4), pages 753-762, July.
    13. Tarek Abdallah, 2019. "On the Benefit (Or Cost) of Large‐Scale Bundling," Production and Operations Management, Production and Operations Management Society, vol. 28(4), pages 955-969, April.
    14. Jeon, Doh-Shin & Menicucci, Domenico, 2009. "Bundling and Competition for Slots: On the Portfolio Effects of Bundling," IDEI Working Papers 574, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jul 2011.
    15. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 34, pages 2221-2299, Elsevier.
    16. Arribas, I. & Urbano, A., 2017. "Multiproduct trading with a common agent under complete information: Existence and characterization of Nash equilibrium," Journal of Economic Theory, Elsevier, vol. 167(C), pages 14-38.
    17. Zhou, Jidong, 2021. "Mixed bundling in oligopoly markets," Journal of Economic Theory, Elsevier, vol. 194(C).
    18. Cao, Qingning & Geng, Xianjun & Zhang, Jun, 2015. "Strategic Role of Retailer Bundling in a Distribution Channel," Journal of Retailing, Elsevier, vol. 91(1), pages 50-67.
    19. Chen, Bo & Ni, Debing, 2017. "Optimal bundle pricing under correlated valuations," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 248-281.
    20. Gastón Llanes & Andrea Mantovani & Francisco Ruiz-Aliseda, 2019. "Entry into Complementary Good Markets with Network Effects," Strategy Science, INFORMS, vol. 4(4), pages 262-282, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:bejeap:v:12:y:2012:i:1:n:12. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.