Analyzing the Welfare Impacts of Full-line Forcing Contracts

Theoretical investigations have examined both anti-competitive and efficiency-inducing rationales for vertical bundling, making empirical evidence important to understanding its welfare implications. We use an extensive dataset on full-line forcing contracts between movie distributors and video retailers to empirically measure the impact of vertical bundling on welfare. We identify and measure three primary effects of fullline forcing contracts: market coverage, leverage, and efficiency. We find that bundling increases market coverage and efficiency, but has little impact on one distributor gaining leverage over another. As a result, we estimate that full-line forcing contracts increased consumer and producer surplus in this application. ∗We thank Richard Mortimer for helpful comments. The data for this study were generously provided to us by Rentrak Corporation. Any remaining errors are our own. †Dean & Company, 8065 Leesburg Pike, 5th Floor, Vienna, VA 22182. Email: [email protected] ‡Department of Economics, Columbia University, New York, NY 10027 and NBER. Email: [email protected] §Department of Economics, Harvard University, Cambridge, MA 02138 and NBER. Email: [email protected]