DP12129 Application Bundling in System Markets
Motivated by recent investigations over Google's practices in the smartphone industry, we study bundling in markets for devices that allow consumers to use applications. The presence of applications on a device increases demand for it, and application developers earn revenues by interacting with consumers. A firm that controls multiple applications can offer them to device manufacturers either individually or as a bundle. We present a novel mechanism through which anti-competitive bundling can be profitable: Bundling reduces rival application developers' willingness to pay manufacturers for inclusion on their devices, and allows a multi-application developer to capture a larger share of industry profit. Bundling can also strengthen competition between manufacturers and thereby increase consumer surplus, even if it leads to foreclosure of application developers and a loss in product variety.