Bundling under the Threat of Parallel Trade
Series/Report no.Cahier de recherche #2006-07
- parallel trade
- [JEL:F12] International Economics - Trade - Models of Trade with Imperfect Competition and Scale Economies
- [JEL:L12] Industrial Organization - Market Structure, Firm Strategy, and Market Performance - Monopoly; Monopolization Strategies
- [JEL:L41] Industrial Organization - Antitrust Issues and Policies - Monopolization; Horizontal Anticompetitive Practices
- [JEL:F12] Économie internationale - Commerce international - Modèle de commerce avec concurrence imparfaite et économies d'échelle
- [JEL:L12] Organisation Industrielle - Stratégie de l'entreprise, structure et performance du marché - Monopoles, stratégies de monopolisation
- [JEL:L41] Organisation Industrielle - Politique anti-trust - Monopoles, pratiques contre la compétition horizontale
This paper examines the use of bundling by a firm that sells in two national markets and faces entry by parallel traders. The firm can bundle its main product, - a tradable good- with a non-traded service. It chooses between the strategies of pure bundling, mixed bundling and no bundling. The paper shows that in the low-price country the threat of grey trade elicits a move from mixed bundling, or no bundling, towards pure bundling. It encourages a move from pure bundling towards mixes bundling or no bundling in the high-price country. The set of parameter values for which the profit maximizing strategy is not to supply the low price country is smaller than in the absence of bundling. The welfare effects of deterrence of grey trade are not those found in conventional models of price arbitrage. Some consumers in the low-price country may gain from the threat of entry by parallel traders although they pay a higher price. This is due to the fact that the firm responds to the threat of arbitrageurs by increasing the amount of services it puts in the bundle targeted at consumers in that country. Similarly, the threat of parallel trade may affect some consumers in the hight-price country adversely.
CRAMPES, Claude, HOLLANDER, Abraham et MACDISSI, Charbel M., «Bundling under the Threat of Parallel Trade», Cahier de recherche #2006-07, Département de sciences économiques, Université de Montréal, 2006, 30 pages.