Bundling and Price-Matching in Competitive Complementary Goods Markets

TL;DR

This paper analyzes how mixed bundling and price-matching guarantees affect competition between two retailers selling complementary goods, revealing conditions under which bundling dominates and how guarantees influence strategic demand and margins.

Contribution

It characterizes unique pure-strategy Nash equilibria in a duopoly with mixed bundling and price-matching guarantees, comparing outcomes to no-bundling scenarios and analyzing strategic trade-offs.

Findings

Mixed bundling strictly dominates in equilibrium when it exists.

Price-matching guarantees influence demand capture and margin trade-offs.

Equilibrium outcomes depend on demand responsiveness and product complementarities.

Abstract

We study mixed bundling and competitive price-matching guarantees (PMGs) in a duopoly selling complementary products to heterogeneous customers. One retailer offers mixed bundling while the rival sells only a bundle. We characterize unique pure-strategy Nash equilibria across subgames and compare them to a no-bundling benchmark. Mixed bundling strictly dominates whenever an equilibrium exists. Conditional on bundling, PMG adoption trades off strategic demand capture against margin losses on loyal customers and varies systematically with relative demand responsiveness to prices and complementarities.