By Arnold Kling
I extended my thoughts on bundling with this essay.
What George Stigler showed is that ordinary intuition about bundling is wrong. Your intuition is that the reason that the seller engages in bundling is to force you to buy something that you do not want. However, as Stigler pointed out, if that were the case, it would be cheaper for the seller to leave out the unwanted good and just charge you for what you want. That is why grocery stores do not bundle milk with broccoli — it’s cheaper for them just to sell you the milk.
…Information goods are almost impossible to sell without bundling. As Carl Shapiro and Hal Varian pointed out in their classic book Information Rules, information goods are characterized by very low marginal cost of production and distribution, as well as by uncertainty on the part of the buyer as to the value (until you’ve actually obtained the good). Accordingly, for producers of information goods, such as software or music, Shapiro and Varian recommend various strategies that involve bundling.
A few years ago, Varian wrote this article on bundling.
consider a company that has substantial market power in both the word-processor and the spreadsheet markets and contemplates bundling them into an office suite.
By bundling these products and selling the bundle at an attractive price, the seller can assure that most potential customers for either product buy the bundle. This means that anyone who wants to enter the market for either word processors or spreadsheets won’t have a significant market left. Here bundling has reduced the reward to potential competitors who want to enter either market.
…Bundling offers a way to extend monopoly, to increase revenue and to raise entry costs. But it may also offer enhanced functionality and lower production costs. Sorting out these benefits and costs of bundling will be particularly challenging for the courts, since the balance of benefits and costs will differ significantly case to case.
For Discussion. In my essay, I point out that
In theory, the government could intervene everywhere it finds bundling. It could stop stores from offering two-for-one specials. It could ban frequent-flyer miles, which are a form of bundling. It could force cable TV operators to offer service by-the-channel instead of as a package, or by-the-minute instead of by-the-month.
How should government decide when to interfere with bundling and when not to interfere?