COMPATIBILITY AND BUNDLING OF COMPLEMENTARY GOODS IN A DUOPOLY

This paper presents a simple model of compatibility and bundling in industries where consumers assemble several necessary components into a system that is close to their ideal. We show that, for a wide range of parameters, firms will choose to produce compatible components but will offer discounts to consumers who purchase all components from the same firm. However, firms would be better off if they could commit not to provide such discounts. Furthermore, the equilibrium tends to involve socially excessive bundling. Finally, mixed bundling strategies tend to increase the range of parameters over which socially excessive standardization occurs.