Endogenous Mergers of Complements with Mixed Bundling

Abstract

This paper studies endogenous mergers of complements with mixed bundling, by allowing both for joint and separate consumption. After merger, partner fi rms decrease the price of the bundled system. Besides, when markets for individual components are suffi ciently important, partner firms raise prices of stand-alone products, exploiting their monopoly power in local markets and making substitute 'mix-and-match' composite products less attractive to consumers. Even though these effects favor the pro fitability of mergers, merging is not always an equilibrium outcome. The reason is that outsiders respond by cutting their prices to retain their market share, and mergers can be unprofitable when competition is intense. From a welfare analysis, we observe that the number of mergers observed in equilibrium may be either excessive (when markets for individual components are important) or suboptimal (when markets for individual components are less important). Keywords: complements; merger; mixed bundling; separate consumption JEL classi fication: L13; L41; D43