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  • Print publication year: 2018
  • Online publication date: January 2018

4 - Tying, Bundling and Bundled Rebates

Summary

Introduction

This chapter focuses on a relatively common business practice, that of selling two or more (different) products in combination. Products are often sold together in the marketplace. In fact, the distinction between a product and its components is often very blurred: cars come with a steering wheel (among many other features), wine bottles with a cork, smart phones with a battery. Firms can combine their sales in many different ways, as we describe next.

Pure bundling refers to the case in which a firm only offers the bundle as a package. Think of a hard drive, a keyboard, a screen and a touch pad all embedded in a laptop. Think also of a pay-TV contract offering a number of pre-packaged bundles of channels.

A firm, instead, engages in tying when it makes the sale of one of its products (the tying product) conditional upon the purchaser also buying some other products from it (the tied product(s)). A well-known example, that we will discuss in Section 4.7, has been Microsoft's former practice of selling its Windows operating system (the tying product) only in combination with the Internet Explorer (the tied product). Note that, differently from pure bundling, users could buy Internet Explorer as a stand-alone product, but could not obtain Windows without Explorer. In this example, the two goods are sold in a fixed, one-to-one, proportion.

In the case of variable proportions, sometimes known as requirement tying, it is left to the buyer to decide on the respective quantities. A frequent example is the requirement that purchasers of a firm's machine, say a printer or a copier, buy also consumables (for example, ink cartridges and toners) or after-sale services from the same firm.

Tying may be also equivalent to full-line forcing, that is, to the case in which a manufacturer supplies a product (or some products) to a buyer (say to a retailer) conditional on the retailer purchasing the whole range of products offered by that manufacturer.

Mixed bundling refers to the situation where a firm, besides offering the package of products at a given price, also supplies the individual products separately. Examples abound across industries. In the telecommunications and media industry, for example, many firms offer bundled packages of voice, internet access and TV (sometimes known as ‘triple play’), but also sell these services independently.