The John M. Olin Center

Paper Abstract

818. James D. Dana, Jr. & Kathryn E. Spier, Do Tying, Bundling, and Other Purchase Restraints Increase Product Quality?, 03/2015; subsequently published in the International Journal of Industrial Organization, Vol. 43 (2016).

Abstract: Tying, bundling, minimum purchase requirements, loyalty discounts, exclusive dealing, and other purchase restraints can create stronger incentives for firms to invest in product quality. In our first example, the firm sells a durable experience good and a complementary non-durable good to a representative consumer. Tying shifts profits from the durable to the non-durable good, making profits more sensitive to the consumer’s experience. In our second example, the firm sells a single experience good to consumers with heteroge­neous demands. Minimum purchase requirements screen out the low-volume consumers who would otherwise free ride on the superior monitoring of the high-volume consumers. The examples illustrate that purchase restraints can increase both firm profits and consumer surplus by making firm profits more sensitive to consumer experience, either directly by giving the consumer more control over the stream of profits or indirectly by constraining consumers to monitor more intensively.

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