Bundling and Competition for Slots

Abstract

We study competition among upstream firms when each of them sells a portfolio of distinct products and the downstream has a limited number of slots (or shelf space). In this situation, we study how bundling a¤ects competition for slots. When the downstream has k number of slots, social e¢ ciency requires that it purchases the best k products among all upstream firms' products. We find that under bundling, the outcome is always socially efficient but under individual sale, the outcome is not necessarily efficient. Under individual sale, each upstream firm faces a trade-off between quantity and rent extraction due to the coexistence of the internal competition (i.e. competition among its own products) and the external competition (i.e. competition from other firms' products), which can create inefficiency. On the contrary, bundling removes the internal competition and the external competition among bundles makes it optimal for each upstream firm to sell only the products belonging to the best k. This unambiguous welfare-enhancing e¤ect of bundling is novel.