On Bundling and Entry Deterrence

A multiproduct incumbent firm faces the threat of entry from another multiproduct (generalist) firm or from single-product (specialist) firms. Assuming that the incumbent offers higher quality products than its rivals, we inquire whether the possibility of bundling by the incumbent is more effective in deterring entry in one setting or the other, and explore how the quality difference affects the comparison. For instance, for relatively high-quality differences the generalist is more vulnerable to bundling than are the specialists; but bundling is a credible action for the incumbent more often against specialists than against the generalist.