KIND research group

Abstract: Motivated by recent investigations over Google's practices in the smartphone industry, we study bundling in markets for devices that allow consumers to use applications. The presence of applications on a device increases demand for it, and application developers earn revenues by interacting with consumers. A firm that controls multiple applications can offer them to device manufacturers either individually or as a bundle. We present a novel mechanism through which anti-competitive bundling can be profitable: Bundling reduces rival application developers' willingness to pay manufacturers for inclusion on their devices, and allows a multi-application developer to capture a larger share of industry profit. Bundling can also strengthen competition between manufacturers and thereby increase consumer surplus, even if it leads to foreclosure of application developers and a loss in product variety.