Empirical investigation on the role of free products in the bundle context

Abstract

Economists and antitrust practitioners have raised regulatory concerns regarding abuses of market power through the bundling of products in the telecommunications and broadcasting industry. Dominant firms may use bundles to transfer market power from one domain to another, and those leverage effects are intensified in multi-sided markets with constraints on negative pricing. Beyond their potential threat to competition, such marketing practices often entail false advertising whereby market-dominant operators frame bundle discounts as the “free” offer of a product (i.e., zero-price marketing)—a topic that remains relatively underexplored in the literature. By modeling the bundling of products with different levels of market competition in the telecommunications industry, we empirically show that consumers irrationally prefer zero-priced bundles over similarly priced groupings of products, further reinforcing the market power of a dominant player. Consistent with strategic foreclosure theory, we find that a mobile network operator can significantly raise its share in the pay-TV market using zero-price marketing. Given consumers’ vulnerability to such “free” offers, their growing popularity in the market, and their potential anti-competitive effects, the risks of zero-priced bundles to consumer welfare cannot be ignored.