acrossmarkets.

Complementarityissometimesinducedbyaproductiontechnologythatexhibitseconomiesofscale.Intheairlineindustry,forinstance,strongeconomiesofdensitygiverisetohub-spokenetworkswhichinturninducecomplementaryservicesbetweenconnecting ights.Amonopoly rmthatoperatesahub-spokenetworkhasincentivestopricelowontheconnectingmarketwherethereisanentrant(Hendricks,Piccione,andTan,1997).Therefore,demandcomplementarityacrossproductscanbeabarriertoentryaswell.

Moreover,whenbothcomplementaryandsubstituteproductsarepresent,twoopposingtypesofdemandexternalitiesarise.Firmsmay nditoptimaltodesignstrategiestoo settheopposingexternalities.ThisisillustratedinTanandYuan(2003),wheretwocompetingconglomerateshaveincentivestodivesttheircomple-mentaryproductlines.

2.3.BundlingandTied-inSale.Thepracticeofgroupingseveralproductstogetherandsellingatonepriceisreferredtoasbundling.Bundlingstrategyispervasiveinpractice.Economistscallontwodominantexplanationsforbundling:pricediscriminationandentrydeterrence.4Theideaofpricediscriminationis rstillustratedinStigler(1963)’sclassicalexampleofcinemablockbookingschemesinwhichatheaterisrequiredtotakeapackageofdi erentmoviesinsteadofonlysinglereleases.AfurtheranalysisispresentedbyAdamsandYellen(1976).Accordingtothem,whenconsumers’valuationsformultipleproductsare(perfectly)negativelycorrelated,bundlingenablesthemonopoly rmtoreduceheterogeneityinvaluationsandhencecapturemoreconsumersurplus.AgeneralformulationisprovidedbyMcAfee,McMillanandWhinston(1989).Theyshowthatthemonopolistprefersmixedbundlingtonobundlingevenifconsumers’valuationsareindependent.Whenvaluationsarecorrelated,theyalsoprovidesu cientconditionsformixedbundlingtodominatenobundling.

Tying(ortied-insale)isaspecialformofbundling.Itreferstoconditioningthesaleofonegoodonthepurchaseofanother.Thisoftenoccurswhenthe rstproductismonopolisticallysuppliedwhilethesecondproductmarketiscompetitive.Thecentralquestioniswhetherthemulti-productmonopolistisabletoextenditsmonopolypowerinthe rstmarkettothecompetitivemarket.Theliteratureo erstwooppositeviews.Theleveragetheorysays“yes”whiletheChicagoSchoolassertstheopposite.Itturnsoutthattheanswerdependonthenatureofconsumers’

Anotherexplanationforbundlingissimplycostsavings.Notethatmostproductsareabundleofseveralcomponents.Insteadoflettingconsumersputdi erentcomponentstogether,itisoftencost-e ectiveforthesellertoo erabundledproduct.SeeSalinger(1995)foradiscussion.4