KRAMER: DIGITAL CONVERGENCE, PRICING STRATEGIES AND FIRMS' PROFITS IN THE TELECOMMUNICATION AND ENTERTAINMENT MEDIA INDUSTRY Digital Convergence, Pricing Strategies and Firms' Profits in the Telecommunication and Entertainment Media Industry

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 bundle pricing 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.