Bundling, Tying, and Portfolio Effects: Part 1 Conceptual Issues

Caution: This proposal should be viewed as a recommendation to investigate this topic
at greater length. We need to better understand the feasibility of this proposal and its
expected effect on pricing.
The proposed remedy is a particularly mild form of regulation. Firms can charge whatever
they want and impose whatever restrictions they want on fares. However, they must
break down each fare into its two one-way components (and the fare need not be
divided 50 - 50). Customers who meet all of the restrictions imposed on the roundtrip
(by both sets of carriers) can then buy their roundtrip using two different carriers.
We believe that today’s modern reservation systems would make this simple to
implement, but this needs to be confirmed. We note that interlining on roundtrips used
to be a common practice. In 1984 13% of U.S. domestic roundtrips involved different
carriers on the outbound and return legs. By 1997, that fraction had fallen to 1.5%. 63
Borenstein attributes this decline to fare policies restricting discounts on interlined
roundtrips, loyalty effects of frequent flyer programs, and increased concentration
at airline hubs. It would also be worth investigating the extent to which this type of
“interlining” is practiced among airlines that have a code-sharing arrangement.
4.4.4 BUNDLING TO GAIN COMPETITIVE ADVANTAGE
We believe that the use of bundling to create a competitive advantage is an important,
but not well understood, concept. The previous example of roundtrip airline tickets
suggested a broader effect that we now explore. The general idea is that a multi-product
firm can offer more variety than a single product competitor. If the products are all sold
individually in the market, then the customer can get all the desired variety by freely
mixing and matching. But if products are offered as a bundle, then the best way to get
variety is to purchase the bundle.
We illustrate this effect with an example that is an adaptation of the Aspen v. Aspen
Highlands court case. 64 Ski resorts ranging from Courcheval to Aspen bundle several
mountains together in a multi-mountain pass. Recently, American Ski Company started
to offer bundled packages that span ski mountains in Maine, Vermont, and Utah. Phone
companies will offer a bundle of mobile and land line. Here, too, these goods would
seem to be substitutes in that if the price of mobile calls is raised, the user will divert
calls to land lines.
At first glance, this is a different phenomenon than we have previously seen. For a skier
at Aspen, the four mountains (Aspen, Snowmass, Buttermilk, and Aspen Highlands) are
primarily substitutes. If the lift tickets were sold individually and the price of Aspen (A)
were to rise, some of its customers would divert their business to Buttermilk (B). Thus, we
have what might seem to be an unusual case of bundling substitute products together.
63 Data from Severin Borenstein presentation “Strategic Incompatibility in the U.S. Airline Industry.”
64 Aspen versus Aspen Highlands is discussed in Section VII of Part II.
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