Competing Against Bundles

In this paper, we show that a firm that sells a bundle of complementary products will have a substantial advantage over rivals who sell the component products individually. Furthermore, this advantage increases with the size of the bundle. Once there are four or more items, the bundle seller does better than when it sells each component individually. This model helps explain one factor in how Microsoft achieved dominance in the Office software suite against pre-existing and well-established rivals in each component. This paper is a sequel to Bundling [Nalebuff (1999) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=185193].