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Endogenous Product Boundary
Author(s) -
Adachi Takanori,
Ebina Takeshi,
Hanazono Makoto
Publication year - 2017
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12134
Subject(s) - microeconomics , economics , economic surplus , profit (economics) , product (mathematics) , valuation (finance) , econometrics , welfare , mathematics , geometry , finance , market economy
This study analyzes the determinants of product boundary choice as discriminatory pricing. Specifically, we consider a model where a monopolist sells a base product with an add‐on valuable only if it is consumed along with the base product. An important feature of this model is that this additional value is contingent on the valuation of the base product. We show that separation, in which case only the base product is sold, yields a higher profit than integration, where only a bundled package is sold, if and only if the range of the add‐on value exceeds a threshold value and that separation is more likely to become optimal as the degree of positive contingency increases. As for welfare, consumer surplus in case of separation is always lower than that when the seller is constrained to sell the bundled package.