The impact of product differentiation on retail bundling in a vertical market

We study the effects of product differentiation on the bundling incentives of a twoproductretailer. Two monopolistic manufacturers each produce a differentiated good. Onesells it to both retailers, while the other only supplies a single retailer. Retailers competein prices. Retail bundling is profitable when the goods are close substitutes. Only thenis competition so intense that the retailer uses bundling to relax competition both withinand across product markets, despite an aggravation of the double marginalization problem.Our asymmetric market structure arises endogenously for the case of close substitutes. Inthis case, bundling reduces social welfare.