Ain’t it “Suite”? Bundling in the PC Office Software Market

We examine the importance of office suites for the evolution of the PC office software market in the 1990s. An estimated discrete demand choice model reveals a positive correlation of consumer values for spreadsheets and word processors, a bonus value for suites, and advantages for Microsoft products. We employ the estimates to simulate various hypothetical market structures to evaluate the profitability, welfare, and competitive effects of suites under alternative correlation assumptions. We find that greater correlation enhances the profitability of bundling due to the interaction of a market expansion effect and a suite bonus effect. In a partial competition setting in which Lotus sells only a spreadsheet and WordPerfect sells only a word processor, we find that Microsoft’s introduction of the suite increases consumer welfare. Furthermore, while the Lotus and WordPerfect suites gained little market acceptance, a merger that creates a new suite combining the best products of both enhances competition only if the new suite overcomes Microsoft’s unobserved quality advantage. *We are grateful to Matt Rothway for research assistance. We are especially grateful to the associate editor for guidance that significantly improved the paper. We are also grateful to Miguel Villas-Boas, the editor, and three anonymous referees for very helpful suggestions. We thank John Asker, Luis Cabral, Robin Lee, Mark Manuszak, Aviv Nevo and seminar participants at various universities and conferences for helpful comments. Riordan thanks the Toulouse School of Economics the hospitality and research support during 2012-2013. Gandal had an academic research grant from Microsoft for other academic papers written during part of the period in which we wrote this paper. Any opinions expressed are those of the authors. Gandal: Berglas School of Economics, Tel Aviv University, [email protected]; Markovich: Kellogg School of Management, Northwestern University, [email protected]; Riordan: Economics Department, Columbia University, [email protected].