Bundling may blockade entry

I consider bundling of two products as a strategy to avoid entry in a differentiated product market. I construct a simple model in which the potential entrant can offer a differentiated product to one of the incumbent's products. I show that the incumbent optimally bundles irrespective of entry. For a given entry decision, the incumbentís gains are small compared to the entrant's loss; its gains are substantial when the bundling induces the potential entrant not to enter the market. In this case bundling blockades entry and reduces welfare.