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Joys of Bundling

July 29, 1998

Tags Big GovernmentCorporate WelfareLegal SystemU.S. Economy

Thomas DiLorenzo is professor of economics at Loyola College and a faculty member of the Mises Institute. His letter in defense of Microsoft appears in the Wall Street Journal, Wednesday, July 29, 1998:

Robert Bork is decades behind the times in antitrust scholarship if he believes there is no efficiency rationale for product bundling ("it produces no significant efficiencies") or exclusive dealing contracts ("their sole function is to exclude rivals"), as he states in his latest critique of Microsoft (Letters to the Editor, July 22).

One obvious reason why product bundling is efficient is that consumers like their products bundled and it is profitable for business to accommodate those preferences. Bundled products often sell for a lower price than if they were all sold separately, and can eliminate the costs of haggling over the prices of separate items. Bundling can also vastly reduce the transaction costs involved in shopping around. New computers typically come equipped with dozens of software products; shopping separately for them is something few consumers care to do. And firms like Microsoft have strong incentives to offer product bundles that are at least as good a quality as the industry average in order to protect their reputational capital.

The seller of a product knows more about that product and how it will perform with other complementary products than consumers do. Hence, bundling is also an attempt to assure that one's product performs as well as possible--an important concern in an industry as competitive as computers.

There are also efficiencies from exclusive dealing contracts of which Mr. Bork seems unaware. When a retailer commits to buy only from a single manufacturer it secures for both parties a planned product flow that reduces record keeping and inventory holding costs. Such contracts also provide stronger incentives for retailers to promote the product of their sole supplier, which can benefit both the manufacturer and the retailer. With an assurance that the retailer will in fact perform in this way, manufacturers often provide their dealers with specialized training and financial assistance that helps with product promotion and service.

Exclusive dealing also increases the return to national advertising by generating more business to all dealers in the product. But if the dealers sell several different products, then the competitors can free ride on the advertising by steering customers who are drawn into their stores by the ads to different brands if those brands yield a higher profit to the dealers.

Finally, exclusive dealing contracts are a way of achieving the benefits of vertical integration without investing capital in retail outlets. That is better left to independent retailers who have better knowledge of local supply and demand conditions.

Thomas J. DiLorenzo
Professor of Economics
Sellinger School of Business and Management
Loyola College in Maryland
Baltimore
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Professor DiLorenzo is also author of a chapter in our new book Secession, State, and Liberty, edited by David Gordon.

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Coming in the Fall 1998 Austrian Economics Newsletter, an interview with the famed Austrian antitrust theorist, Dominick Armentano, whose book Antitrust and Monopoly: Anatomy of a Policy Failure is available through our on-line catalog.


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