Bundling vertically differentiated communications services to leverage market power

Purpose – The purpose of this paper is to investigate whether and how bundling services may achieve leverage of market power from the telco’s home to a secondary service market (e.g. video broadcasting). Despite digital convergence, in many countries the former telco monopolist remains to hold significant market power in its home market for telecommunication services. Design/methodology/approach – To this extent the author considers a formal game-theoretic model where the telco firm holds a monopoly in the market for telecommunications services, while competing with a cable firm in the market for video broadcasting services. Services may differ in quality. For the firms, the provision of high-quality services is more costly than the provision of low-quality services. Conversely, consumers have a greater reservation price for higher service qualities. Therefore firms face a trade off between revenues and cost when selecting the optimal service quality. Findings – The model shows that the telco firm can achieve market power leverage by bundling its services, which therefore is more profitable than offering each service separately. In particular, the quality leverage mechanism is highlighted, which reveals that bundling alters the optimal service quality choice of the competitors favorably. Research limitations/implications – Like every game-theoretic model, the present model rests on formal assumptions representing stylized facts. Future research should determine these by empirical evidence. Practical implications – The paper reveals how bundling may be employed as a strategic weapon in order to increase profits in the converging communications market. Originality/value – The paper shows that bundling communications services can not only have significant ramifications for the quality of these services, but also for the competition in industry.