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A Game-Theoretic Analysis of Product Bundling Strategies for Distribution Firms with Double Marginalization Structure

Kim, Dohwan

Published: January 2003 · Vol. 32 No. 4 · pp. 1207-1220
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Abstract

This paper uses game theory to analyze the strategic behavior of a distribution firm that competes on price against a specialized firm in which production and distribution functions are vertically integrated for a specific product. A distribution firm that receives products from a manufacturer and is responsible only for sales is at a relative cost disadvantage compared to a vertically integrated firm due to the double marginalization structure. The focus of this study is why such a distribution firm chooses a bundling strategy of selling complementary supplementary products as a bundle that differentiates it from competing firms. Previous studies on various bundling strategies have focused on predatory behavior by monopolistic firms that impede competition or on profit maximization behavior by competitively dominant monopolistic firms. However, this study demonstrates that even a distribution firm at a competitive disadvantage due to the double marginalization structure can maximize its profits by bundling complementary supplementary products in competition against an integrated specialized firm.
Keywords: Bertrand gamebundlingcomplementary productsdouble marginalization