Arnold Kling

Bundling

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The issue of bundling has been in the news recently. For example, the Europeans want to punish Microsoft for bundling a media player with its operating system. Professor Bainbridge supports the regulators in this case.


Prohibiting Microsoft from bundling, say, media players and search engines into the Windows operating system is critical to preserving competition and promoting innovation.

Also, Congress is considering forcing cable companies to unbundle their channel offerings.

Committee Chairman John McCain (R-Ariz.) peppered Cox Communications Inc. President James O. Robbins, asking the head of the nation's fourth-largest cable company why consumers have to pay for channels they don't want. Robbins's answer: Giving consumers that degree of choice would cost too much.

Suppose that we adopt the position that everywhere there is bundling, the government should step in to regulate product offerings and pricing. In that case, it seems to me that we might as well abandon capitalism and go for a complete command-and-control economy.

Is it wrong for an operating system to come bundled with a media player? Then why is it not also wrong for a car to come bundled with a media player (i.e., a radio)? Is it wrong for two cable channels to be bundled? Then is it not also wrong for CNN to have a bundle that includes Lou Dobbs and Larry King, given that some people want to watch one but not the other?

Bundling is everywhere. Phone plans that offer flat rates rather than by-the-minute pricing? That's bundling. Computers that are sold complete with monitors, keyboards, and speakers? That's bundling. Cell phones that are sold with cameras and WI-FI? That's bundling.

Regulators could argue that bundling by Microsoft or the cable companies needs to be regulated because those companies have monopoly power. But I would rather see product specifications and pricing set in a market, however imperfect, than set by a government bureaucrat. At best you are exchanging one uncompetitive decision process for another.

I do not see any way to preserve the free market system if you decide that bundling provides a rationale for regulation.

For Discussion. Of all of the potential ways in which monopoly could be harmful, how important is bundling?


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TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/61
The author at Knowledge Problem in a related article titled BUNDLING AS A RATIONALE FOR REGULATION? I SHOULD THINK NOT writes:
    I am really glad that folks around here have picked up this bundling conversation. See, for example, Stephen Bainbridge's observations, who argues that bundling is anticompetitive. I disagree, as long as the consumer has an opportunity to say "no" and... [Tracked on March 29, 2004 9:15 AM]
The author at Venturpreneur: A Blog on Law, Entrepreneurship, Globalization & Other Esoterica in a related article titled Carnival of the Capitalists -- April 5 Edition writes:
    I have been a no-show for recent editions of Carnival of the Capitalists, but I am scheduled to host soon, so I am getting my act together. This week's edition is up over at Crazy Pundit. The big topic: outsourcing.... [Tracked on April 5, 2004 9:26 AM]
The author at Unpersons in a related article titled Carnival of the Capitalists writes:
    The 5 April edition of the Carnival of the Capitalists has just appeared at Crazy Pundit. Crazy Pundit Jonathan has done a great job of putting together this week's round-up of some of the blogosphere's most stimulating and well-written capitalist... [Tracked on April 5, 2004 10:41 AM]
COMMENTS (19 to date)
Eric Krieg writes:

I have to say that I hate cable bundling. I got rid of cable because I didn't feel that I was getting my money's worth. I was watching just a few channels, and truth be told, most of them were broadcast networks anyway.

I have a feeling that bundling of cable channels has more to do with technology than with monopoly. There really isn't a mechanism to provide channels a la carte. You pretty much get all or nothing.

Bernard Yomtov writes:

"Regulators could argue that bundling by Microsoft or the cable companies needs to be regulated because those companies have monopoly power. But I would rather see product specifications and pricing set in a market, however imperfect, than set by a government bureaucrat."

You're setting up a straw man here, Arnold. Nobody is suggesting that the government set prices for these bundled products. Rather, they are suggesting that bundling by monopolies interferes with the market mechanism. In other words, it blocks what you claim to want - price setting by the market.

Boonton writes:

I agree, no one has proposed regulating bundling. Rather bundling is regulated when the issue is monopoly power. IMO, Microsoft's monopoly power has been called into question by the rise of Linux in the last few years. Even MS-Office can be effectively replaced by Open Office for a fraction of the cost.

Rob Sperry writes:

"Rather, they are suggesting that bundling by monopolies interferes with the market mechanism."

At best it blocks the way regulators think the market ought work. But it certainly doent prevent the sellers of property to come to terms with the buyers on a sale...which is the market mechanism.

I further find it ironic that both the american and european anti-trust actions have been taken on items which are comonly given away for free by both microsoft and thier competetors... i.e browsers and mediaplayers.

Anyone paid for a Realmeadia or Quicktime player (and not the special content packages)?

Rob Sperry writes:

"I agree, no one has proposed regulating bundling. Rather bundling is regulated when the issue is monopoly power. "

By going after "monopolies" for bundling they are regulating bundling, if only a portion of it. Monopoly power is an extremly vague idea... so the effective result is to regulate any market leaders ability to bundle.

Microsoft has loads of cash, i'd like to see them just refuse to sell anything more in europe

Then we will see if they have monopoly power.

Lawrance George Lux writes:

Bundling does lead to monopoly pricing--case in point is the Telephone prices: reliable sources (at least for myself) suggest any Call anywhere in the World could be made for four cents a minute. They bundle local services, and they bundle Long Distance services, finishing with excessive Cellphone rates. Another element is lack of bundling--Phone companies should have taken over Cable companies and broadcast networks long since--with Dial-up specific programing at about 7-8 Cents a minute--here lack of bundling causing non-Market costs. The Issue is not bundling or non-bundling, but the existence of excessive non-market monopoly pricing. lgl

Cap'n Arbyte writes:

LGL,

But (local) telephone companies are monopolies. It's the law that's caused monopoly pricing there, not the market. Further, I think the regulators would go nuts if telephone companies started buying cable companies and broadcast networs. I'd like to see if your predictions would come true, but Congress is standing in the way.

Bernard Yomtov writes:

"At best it blocks the way regulators think the market ought work. "

Actually, it blocks markets from working in the way that leads to economic efficiency. Markets are a human institution, not an Eden-like blissful state of nature. We use them because they do their job very well, but they are far from perfect, and monopoly is one imperfection (which by the way does produce deadweight losses). There is no inherent reason why regulation in such situations is harmful.

Stan writes:

Isn’t it a little ironic that elected officials are condemning an industry for "bundling?" Senators, like Sen. McCain, receive votes from people who may not like their views on any number of issues, from tax policy to abortion to the War on Terror. In the system we have now, it is very unlikely that a voter will agree with al the views his chosen representative holds (if he even takes the time to learn what they are). However, voters pick a candidate that is the least of two evils and vote nonetheless. Elected officials are the biggest bundles out there and it is very difficult for an angry "customer" to fire them. So before McCain and his friends haul off on another industry, maybe they should un-bundle themselves first.

Boonton writes:
I further find it ironic that both the american and european anti-trust actions have been taken on items which are comonly given away for free by both microsoft and thier competetors... i.e browsers and mediaplayers.

Anyone paid for a Realmeadia or Quicktime player (and not the special content packages)?

No but that's not really the purpose of giving it away for free. If enough people use your media player then you effectively have a lock on the medium. You can extract monopoly pricing from broadcasters (cause without you they won't be able to reach Internet users) & from users who will eventually have to pay you for your 'premium' content (think 'HBO on the Net').

At the moment, its unclear whether Microsoft's monpoly power will be able to pull such a coup off. The Open Source community has done an admirable job of producing goods for the public domain that are of equal or better quality than Microsoft.


By going after "monopolies" for bundling they are regulating bundling, if only a portion of it. Monopoly power is an extremly vague idea... so the effective result is to regulate any market leaders ability to bundle.

So again the issue is not the regulation of bundling but the regulation of bundling by monopolies. Traditionally, monopolies were regulated on their prices. That doesn't mean that all businesses that have prices are regulated!

Old Whig writes:

"You can extract monopoly pricing from broadcasters (cause without you they won't be able to reach Internet users) & from users who will eventually have to pay you for your 'premium' content (think 'HBO on the Net')."

Does anyone have a real example of this happening without a serious government intrusion?

Jim Glass writes:
Rather bundling is regulated when the issue is monopoly power.

It's not even that. Law and analysis have long said bundling (or tying) is OK even for a monopolist, in general. The classic example is a monopolist photocopier company that requires customers to buy its toner or paper or whatever to go with its copier machine. The reason this type of situation is OK is that customers have a given price point for "copying services", not for copiers or toner or paper separately, so however the cost of "copying services" is divied up among the components of the service doesn't really matter, it all totals up to the same price point in the end. It really doesn't make a difference.

Bundling/tying becomes a problem only when a monopolist in one market uses it to obtain another monopoly in a different, new, emerging market. This was considered largely "theoretical" back in the pre-Internet industrial era, and after a few early court cases worked out the analysis few took it seriously as a real-world issue.

But the Internet and the new tech industries have made it a real issue today. Hal Varian did a Times story on why.

amcguinn writes:

If a car maker bundled a radio that would only receive stations whose broadcasters paid a license fee to the car maker, then the authorities might take an interest.

That is precisely the issue here: there are two methods a provider can use to issue DRM-protected data to PC users: windows media or realNetworks. In either case, they have to pay the respective company. In either case, the user can download the player - for free - from the respective software company. But since all windows users have windows media already, but might have to go through an extra download step to use realPlayer, windows media is the more attractive option. Thus Microsoft extends its monopoly from desktop operating systems to DRM content distribution. That's what the authorities don't like.

I'm not saying they're right, mind, but that's the logic, and it's not bundling per se that's the problem -- it's bundling of client tools that give them an advantage in server sales.

After all, an operating system is, fundamentally, just a collection of software tools. Among all the different tools that make up MS-windows, it's only two network clients - the web browser and the media player - that competition authorities have objected to.

Old Whig writes:

I've downloaded RealNetworks and I barely have any use for the thing. It was just free and I thought I might want it later.

Why are so many people so complacent about accepting the status quo? Do they profit from unnecessary, inefficient wrinkles in the economy? Courtiers.

AJE writes:

For an article on a more subtle form of bundleing, visit The Filter^:

http://thefilter.blogs.com/thefilter/2004/03/type_slowly.html

Jim Glass writes:

This is not exactly on topic regarding bundling, but it's my favorite anti-trust case of the week.

The University of Wisconsin put the arm on the bar owners in Madison to eliminate their drink specials on the weekends because it thought its students were enjoying them too much. The bar owners went along. Now aggrieved drinkers who are paying higher prices are suing the bars (and maybe the University next) on anti-trust gounds.

"UW law professor and anti-trust expert Peter Carstensen say the case is valid. He said if a group of Madison bars agreed to raise prices, they are lucky they are only getting sued civilly.

"'People go to jail for doing that,' Carstensen said. 'It is illegal for competitors to agree on what they are going to do, no matter how benign their alleged motives are.'" Story

Ian Callum writes:

Bundling is a strategy that monopolists can use to extend their monopoly. Consumers are forced to buy something they don't want in order to get what they do want. This clearly creates economic inefficiency, since these resources could be used more productively.

Most monopolies result from government action, so perhaps it is incumbent on government to act against bundling. There's no rational reason that cable television should be a monopoly, and government should act to rectify their error in creating the cable monopoly. It's not entirely clear that Microsoft really is a monopoly, so there's less reason for government intervention there.

Mats writes:

"Is it wrong for an operating system to come bundled with a media player?"

It sure is if the sole purpose of the bundling is to keep an entire branch of the world economy under the control of a single company!

Capitalism, competition, free markets? Yes please!

Eric Krieg writes:

>>It sure is if the sole purpose of the bundling is to keep an entire branch of the world economy under the control of a single company!

Why is that bad?

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