Bundling as a Way to Leverage Monopoly

Barry Nalebuff
To the layperson, it would seem to make perfect sense that a firm with a monopoly in good A could use that power to extend its market power into another market, B. The law might prevent such an extension of market power, but absent such a restraint, a monopolist would have an incentive to do so.

Thus, it was surprising when the Chicago School provided an argument that seemed to show that leveraging monopoly into a competitive market provided no advantage.1 As Bork (1995) famously wrote: "There is only one monopoly profit."

The point of the study is to show that the layperson is mostly right, after all. While there are some special cases in which leverage does not lead to higher profits, in the general case, a monopolist can earn higher profits by leveraging its power into a competitive market.