Mix And Match Product Compatibility Without Network Externalities

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Mix And Match Product Compatibility Without Network Externalities
Carmen Matutes
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P^3-P^^] 4A 4A Solving the eyatem of first order conditions, one gets: =i 1. 56A = P =; 1. 15X A 2A B 2B /Z =i 0. E641X ff* =1 0. 7791X a Comparing these results to those obtained In the absence of bundling (table 1), It appears that: "nN ^ ^BN ^ "bB " "nB so that both firms vlll choose not to bundle, which Is Indeed the best they can do. That this Is In sharp contrast to the results derived for local monopolists should not be surprising given our discussion In section &. Bundling Increases the... extent of Internalization of the complementarity links between a firm's own components, leading to more price-cutting vhlch can only harm profits since the whole market Is served anyway. The fact that ^uu * ^Du just says that the losses from such harmful NN dN price-cutting outweigh the benefits to the bundling firm of the 'free rider' phenomenon described earlier. If both firms were to bundle, consumer surplus and social surplu8. > CS* B c SS* ^ C - 0. 5938X

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