Working Paper No. 10-29:
Can Bundled Discounting Increase Consumer Prices Without Excluding Rivals? A Comment on "Tying, Bundled Discounts, and the Death of the Single Monopoly Profit" by Einer Elhauge

Author(s):

Daniel Crane, Joshua Wright

Date Posted: June 2010

Availability:
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Abstract:

Since we abhor suspense, we will quickly answer the question our title poses: No.  As a general matter, bundled discounting schemes lower prices to consumers unless they are predatory—that is to say, unless they exclude rivals and thereby permit the bundled discounter to price free of competitive restraint.  Professor Elhauge argues that bundled discounting can have “power effects” identical to conventional tying arrangements irrespective of any exclusionary effect on rivals as well as that cost/revenue tests for bundled discounting perversely immunize the worst bundled discounting schemes—those that represent the highest non-exclusionary price increases to consumers.

We disagree with Professor Elhauge on these propositions, as we do on many of the earlier arguments in his draft. For the purposes of this symposium, we tackle only the last of these propositions. In brief, we argue that Elhauge’s “power effects” thesis as to bundled discounts rests on a faulty premise—that the monopolist is free to threaten an unlimited price on the monopoly item in the bundle and, consequently, can charge a higher price for the bundle than it could for sales of the goods individually. To the contrary, since a rational monopolist will already have charged the profit-maximizing monopoly price on the monopoly item, its threat to charge a higher price unless the customer accedes to a bundled discount demand is hollow. Execution of such a threat would harm the monopolist, and harm it considerably more than the opposite predatory strategy of cutting prices.