Bundling as a Leverage Device in Quality Differentiated Duopolies with Home Markets

Digital convergence of telecommunication and entertainment media services drove former network monopolists into a prisoner’s dilemma forcing them to enter each others markets. In this reciprocal duopoly firms now offer their services in a bundle commonly known as Triple Play. I investigate whether bundling is indeed a profitable pricing strategy for these services and if it can facilitate market power leverage. I will show that bundling serves as a powerful leverage device for one firm in this industry. This is achieved through a quality sorting effect accruing as the firms wish to shield themselves from increased price competition in the market for bundles. Thereby, one firm emerges as the high-quality, high-profit provider in both markets, whereas the competing firm has to settle for low qualities and profits. Finally, I show that bundling raises not only producers’ but also consumers’ welfare.