Cross-Subsidization Doesn’t Make Mixed Bundling Anticompetitve
I’ve got to disagree with Manfred’s analysis of mixed bundling, for reasons I explain in my U. Chi. L. Rev. essay on LePage’s and my forthcoming article in the Emory L. J. on mixed bundling. Cross-subsidization adds nothing to the plausibility of the strategy. When A offers the bundle at a $1.50 discount, it is sacrificing a profit of $1.50 per sale in order to “exclude” B from the market. Money is fungible. That sacrifice is identical to the sacrifice A would make if it took $1.50 out of a bank account to pay for single-product predation. It is no more plausible to think that A would sacrifice the $1.50 of monopoly profits to effectuate an above-variable-cost price that B must meet than to think that A would withdraw that money from its bank account to engage in single-market predation. The recoupment doesn’t happen any sooner. A can only charge a monopoly price for Wc if it first drives out B.
It’s my view that the cross-subsidization story never makes sense unless there is rate regulation in one market and the monopolist is using the cross-subsidization to cheat the rate regulators in one market and predate in another market. Not so in LePage’s or any of the other pending mixed bundling cases I’m aware of.
The really interesting distinctions between single-product predation and bundling concern a model where A doesn’t have to sacrifice profits at all because it is raising its price on the competitive product at the same time that it’s discounting its monoply product. The customer buys the package, even though the net price of the two products is the same or higher, because it prefers to buy more of the monopoly product and less of the competitive product. Barry Nalebuff has developed an interesting model where there is “instant recoupment” even as the competitor is being driven from the market. In my forthcoming Emory article, I explain why that model is conceptually interesting but: (1) not relevant to almost any of the recent bundling cases; and (2) not a good case for being restrictive with mixed bundling, because it shows a strategy that generally increases consumer (and social) welfare.
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February 23rd, 2006 at 4:59 pm
[...] I have argued that one way to construct an argument against the permissibility of above-cost mixed bundling (and against applying a predatory-pricing analysis to mixed bundling) is look at the cross subsidy from the monoply market for Wm to the competitive market for Wc. Dan Cran responded that cross subsidies using the monopoly profits shouldn’t matter: When A offers the bundle at a $1.50 discount, it is sacrificing a profit of $1.50 per sale in order to “exclude” B from the market. Money is fungible. That sacrifice is identical to the sacrifice A would make if it took $1.50 out of a bank account to pay for single-product predation. It is no more plausible to think that A would sacrifice the $1.50 of monopoly profits to effectuate an above-variable-cost price that B must meet than to think that A would withdraw that money from its bank account to engage in single-market predation. The recoupment doesn’t happen any sooner. A can only charge a monopoly price for Wc if it first drives out B. [...]