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The Impact of Product Qualities on Downstream Bundling in a Distribution Channel

Author

Listed:
  • Angelika Endres

    (Paderborn University)

  • Joachim Heinzel

    (Paderborn University)

Abstract

We study the impact of exogenous product qualities on a downstream firm’s decision to bundle and the welfare effects of downstream bundling. We consider a distribution channel with two downstream firms and two price-setting monopolistic upstream producers. One upstream firm sells its good 1 exclusively to one downstream firm and the other upstream firm sells its good 2 to both downstream firms. The downstream firms compete in prices and the two-product downstream firm has the option to bundle its goods. We find that downstream bundling aggravates the problem of double marginalization in the channel, but reduces the intensity of downstream competition. Finally, bundling is profitable for the two-product downstream firm only when the quality of good 2 exceeds the quality of good 1. However, bundling is always profitable when the production process is controlled by the downstream industry. The impact on total welfare is ambiguous and depends on the distribution of market power in the channel and the quality levels of the goods.

Suggested Citation

  • Angelika Endres & Joachim Heinzel, 2019. "The Impact of Product Qualities on Downstream Bundling in a Distribution Channel," Working Papers CIE 127, Paderborn University, CIE Center for International Economics.
    • Handle: RePEc:pdn:ciepap:127
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    File URL: http://groups.uni-paderborn.de/wp-wiwi/RePEc/pdf/ciepap/WP127.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Angelika Endres-Fröhlich & Burkhard Hehenkamp & Joachim Heinzel, 2022. "The Impact of Product Differentiation on Retail Bundling in a Vertical Market," Working Papers Dissertations 91, Paderborn University, Faculty of Business Administration and Economics.

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    More about this item

    Keywords

    channel conflicts; double marginalization; downstream bundling; leverage theory; quality differentiation;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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