Differentiation and discrimination in a duopoly with two bundles

This paper provides a theoretical rationale for the market outcomes in which some firms practice pure tying (i.e., sell only a bundle) while others practice mixed tying (i.e., sell a bundle and separated components). In the existing literature, such situations are not accounted for since only pure tying or mixed tying equilibria are exhibited. Using a duopoly model with two bundles and the possibility for firms to practice mixed tying, we show that there exist equilibria in which one firm sells one bundle while the rival sells the second bundle and a separated component. These equilibria result from a combination of discrimination and differentiation effects.