Bundling and Competition for Slots

We study competition among upstream firms when each of them sells aportfolio of distinct products and the downstream has a limited numberof slots (or shelf space). In this situation, we study how bundlinga¤ects competition for slots. When the downstream has k number ofslots, social e¢ ciency requires that it purchases the best kproducts among all upstream firms' products. We find that underbundling, the outcome is always socially efficient but under individualsale, the outcome is not necessarily efficient. Under individual sale,each upstream firm faces a trade-off between quantity and rentextraction due to the coexistence of the internal competition (i.e.competition among its own products) and the external competition (i.e.competition from other firms' products), which can create inefficiency.On the contrary, bundling removes the internal competition and theexternal competition among bundles makes it optimal for each upstreamfirm to sell only the products belonging to the best k. This unambiguouswelfare-enhancing e¤ect of bundling is novel.