Anticompetitive Bundling When Buyers Compete

Abstract

We study the profitability of bundling by an upstream firm that licenses technologies to downstream competitors and that faces competition for one of its technologies. In an otherwise standard “ Chicago-style” model, the existence of downstream competition can make inefficient bundling profitable. Forcing downstream firms to use an inefficient technology reassures each one that it will face weak competition. This allows the upstream firm to extract more profit through its monopolized technology. A similar logic can make it profitable to degrade interoperability with rival technologies, even without foreclosing competition. Bundling is most profitable when downstream competition is intense and technologies complementary. (JEL D21, D24, D43, D45, G34, L24)