Impact of channel structure on a manufacturer's bundling decision with an application to digital goods

This is the authors' abstract. We don't add key points for this paper.

This paper studies the impact of channel structure on an upstream manufacturer's bundling incentive, with a focus on the implications of channel structure for bundling digital goods. We consider a distribution channel with a manufacturer and a retailer. The manufacturer produces two products and sells them either separately or in the form of bundles to end consumers through a downstream retailer. Our analysis reveals that a manufacturer may have a stronger incentive to bundle when selling through a downstream retailer than when selling directly to consumers. Bundling serves as a tool for the manufacturer to reduce the harm associated with the well‐documented double marginalization problem. Therefore, our paper provides a new rationale to the bundling literature, which has traditionally focused on the role of bundling in helping a firm price‐discriminate consumers or gain competitive advantages against peer firms. Further, contrary to the conventional wisdom that asymmetries in bundled products hurt a firm's bundling incentive, we show that asymmetries can strengthen the manufacturer's incentive to bundle in a distribution channel. We also find that, as the marginal production costs decrease, a decentralized channel structure is more likely to lead to manufacturer bundling than a centralized one. Our results help explain the prevalence of bundling, especially digital products, in practice.