A more general theory of commodity bundling

This paper extends the standard model of bundling as a price discrimination device to allow products to be substitutes and for products to be supplied by separate sellers. Whether integrated or separate, firms have an incentive to introduce a bundling discount when demand for the bundle is elastic relative to demand for stand-alone products. Product substitutability typically gives an integrated firm a greater incentive to offer a bundle discount (relative to the model with additive preferences), while substitutability is often the sole reason why separate sellers wish to offer inter-firm discounts. When separate sellers coordinate on an inter-firm discount, they can use the discount to overturn product substitutability and relax competition.