Bundling a Free Product : Competition and welfare

In digital markets, big technology firms like Google, Microsoft, Amazon, etc., compete with each other across multiple markets. Some markets are platforms/two-sided with products offered for free to users, whereas other markets are one-sided with paid products. In some cases, market competition is asymmetric with a single firm dominating the one-sided market. Using a game-theoretic model, we examine how bundling a free platform product/service with a dominant product affects competition between the multi-product firms. Incorporating the platform market structure yields several interesting results. It is shown that bundling by the dominant firm would make i) both firms worse off for small level of dominance, ii) dominant firm better off and rival firm worse off for intermediate level of dominance, and iii) both firms better off for large level of dominance. The results are different from the literature on bundling in one-sided markets and help us understand the variation in firms’ business models in digital markets. Moreover, from a regulatory viewpoint, we examine the implications of bundling for the user and social welfare. Importantly, an anti-competitive bundling can increase social welfare but at the cost of reduced user welfare