Publications

Larry Wood, the Executive Director of Benhaven, Inc., picked up his last annual financial report for the organization. During his recent meeting with the Board of Directors, the members had asked difficult ques­tions about the disappointing year-end financial results of Benhaven’s for-profit venture, Benhaven’s Learning Network (BLN). While BLN had met its targets in its first year of operations, the current year had been more disappointing. Larry understood the Board’s concern, but also believed that BLN needed to grow at its own pace.

Linda Grimm currently ran BLN and served as both the Director and Managing Consultant of the venture. As Larry contemplated contacting Linda, he knew that she was usually very busy and probably would not share the Board’s concern about growth. As both a director and BLN consultant, Linda worried more about fulfilling BLN’s social mission, getting the right people for the job, and preserving the strong sense of community amongst her consultants. Larry glanced again at the report and began to wonder if the current structure and processes of BLN would become a problem. With Linda consulting while she managed the organization, did she have the time or energy to ensure growth and profitability while still driving the social objectives? 

This paper shows how a monopolist generally can increase its profits by offering a discount on its monopolized product if the customer agrees to buy a competitively supplied good from it at a price premium. The use of bundling to leverage market power has a long (and checkered) history in law and economics. The Chicago School seemed to end the debate with their result that there is only one monopoly profit and thus there is no gain from bundling. This folk theorem relies on some special assumptions, most importantly that the goods are consumed in fixed proportions. Once we allow for continuous consumption levels, then it is generally the case that a firm can extend a monopoly from A into a competitive B market. While it is well understood how a monopolist can use tying to extract more consumer surplus or to engage in price discrimination, this paper pursues a different motivation. The emphasis of this paper is on optional, as opposed to forced, tied sales. The firm offers to scale back its monopoly price in return for getting a price premium in a second market. The reduction in monopoly price causes no first-order loss to the firm, while providing a first-order incentive for customers to voluntarily accept the deal. The ability of a monopolist to extend its influence to adjacent markets is a challenge both to the competitors in those markets and to economists looking to understand the antitrust implications of bundling.