Working paper 00/022 - Abstract

Evaluating the Leverage Theory of Product Bundling in the Context of Negotiations

Esther Gal-Or*

*Katz Graduate School of Business, University of Pittsburg

I have developed a model to evaluate the leverage theory of product bundling in the context of negotiations between a monopolist and intermediaries who sell its products to consumers. I investigated whether the monopolist finds it feasible and advantageous to utilize product bundling in order to block negotiations between the intermediaries and a rival firm who competes against the monopolist in a complementary market. My results support the Chicago School conventional wisdom that product bundling is ineffective in extending monopoly power, even in this modified environment where it affects the bargaining position of the monopolist in negotiations with powerful business partners. Specifically, the monopolist finds foreclosure of competitors via bundling either unprofitable or not feasible.

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