Innovation-based analyses of pooling, bundling, and exclusion

Innovation-based analyses of pooling, bundling, and exclusion

In this dissertation I examine the incentives for and the efficiency of pooling, bundling, and exclusive dealing in innovative industries. In the first chapter I re-examine whether cooperation between complementary monopolists increases consumer surplus. The premise of my approach is that when each incumbent monopolist faces potential entry, efficiency comparisons that follow Cournot’s celebrated double monoply analysis can be at odds with the implications of an established corollary of the Chicago School’s single monopoly rent theorem. I show that Cournot’s double monopoly result can be overturned when each incumbent monopolist’s incentive to induce entry is taken into account. In the second chapter I examine contractual bundling and tying when the buyer makes a different complementary investment specific to each traded good, the success of each investment is uncertain, and the seller and the buyer cannot make unconditional contracts for trades before investments area made and uncertainty is resolved. The analysis reveals a novel rationale for bundling. I show that bundled pricing is always profitable for the seller because it facilitates investment-inducing price discrimination. In the third chapter I examine the incentives for and the efficiency of exclusive dealing when the incumbent’s and the entrant’s probabilities of success are increasing in investments. I show that exclusive dealing can be profitable for an incumbent seller, and I show that if buyers can breach exclusive dealing contracts efficiently by paying expectation damages, exclusive dealing can decrease the buyers’ total expected surplus. This analysis is in contrast with both the Chicago School view on exclusive dealing, according to which inefficient exclusive dealing is never profitable, and the more recent formal theories of exclusive dealing, according to which non-discriminatory exclusive dealing contracts are not profitable when buyers coordinate on their most preferred equilibrium.
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