Product Variety and Quality

1

Product Variety and Quality

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Introduction

• Most firms sell more than one product• Products are differentiated in different ways

– horizontally• goods of similar quality targeted at consumers of

different types– how is variety determined?– is there too much variety

– vertically• consumers agree on quality• differ on willingness to pay for quality

– how is quality of goods being offered determined?

Modeling horizontal differentiation

• Address models– Consumers have preferences over the characteristics of

products

• Monopolistic competition model– Consumers have preferences over goods and a taste for

variety

3

4

Horizontal product differentiation• Suppose that consumers differ in their tastes

– firm has to decide how best to serve different types of consumer

– offer products with different characteristics but similar qualities

• This is horizontal product differentiation– firm designs products that appeal to different types of

consumer– products are of (roughly) similar quality

• Questions:– how many products?– of what type?– how do we model this problem?

5

A spatial approach to product variety• The spatial model (Hotelling) is useful to

consider– pricing– design– variety

• Has a much richer application as a model of product differentiation– “location” can be thought of in

• space (geography)• time (departure times of planes, buses, trains)• product characteristics (design and variety)

– consumers prefer products that are “close” to their preferred types in space, or time or characteristics

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A Spatial approach to product variety 2• Assume N consumers living equally spaced along Main

Street – 1 mile long.• Monopolist must decide how best to supply these

consumers• Consumers buy exactly one unit provided that price

plus transport costs is less than V.• Consumers incur there-and-back transport costs of t

per mile• The monopolist operates one shop

– reasonable to expect that this is located at the center of Main Street

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The spatial model

z = 0 z = 1

Shop 1

t

x1

Price Price

All consumers withindistance x1 to the leftand right of the shopwill by the product

All consumers withindistance x1 to the leftand right of the shopwill by the product

1/2

V V

p1

t

x1

p1 + tx p1 + t.x

p1 + tx1 = V, so x1 = (V – p1)/t

What determinesx1?

What determinesx1?

Suppose that the monopolist sets a price of p1

Suppose that the monopolist sets a price of p1

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The spatial model 2

z = 0 z = 1

Shop 1

x1

Price Price

1/2

V V

p1

x1

p1 + t.x p1 + t.x

Suppose the firmreduces the price

to p2?

Suppose the firmreduces the price

to p2?

p2

x2 x2

Then all consumerswithin distance x2

of the shop will buyfrom the firm

Then all consumerswithin distance x2

of the shop will buyfrom the firm

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The spatial model 3

• Suppose that all consumers are to be served at price p.– The highest price is that charged to the consumers at the ends of

the market

– Their transport costs are t/2 : since they travel ½ mile to the shop

– So they pay p + t/2 which must be no greater than V.

– So p = V – t/2.

• Suppose that marginal costs are c per unit.

• Suppose also that a shop has set-up costs of F.

• Then profit is (N, 1) = N(V – t/2 – c) – F.

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Monopoly pricing in the spatial model

• What if there are two shops?

• The monopolist will coordinate prices at the two shops

• With identical costs and symmetric locations, these prices will be equal: p1 = p2 = p– Where should they be located?

– What is the optimal price p*?

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Location with two shops

Suppose that the entire market is to be servedSuppose that the entire market is to be servedPrice Price

z = 0 z = 1

If there are two shopsthey will be located

symmetrically a distance d from theend-points of the

market

If there are two shopsthey will be located

symmetrically a distance d from theend-points of the

market

Suppose thatd < 1/4

Suppose thatd < 1/4

d

V V

1 - dShop 1 Shop 2

1/2

The maximum pricethe firm can chargeis determined by the

consumers at thecenter of the market

The maximum pricethe firm can chargeis determined by the

consumers at thecenter of the market

Delivered price toconsumers at the

market center equalstheir reservation price

Delivered price toconsumers at the

market center equalstheir reservation price

p(d) p(d)

Start with a low priceat each shop


Now raise the priceat each shop


What determinesp(d)?

What determinesp(d)?

The shops should bemoved inwards

The shops should bemoved inwards

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Location with two shops 2

Price Price

z = 0 z = 1

Now suppose thatd > 1/4

Now suppose thatd > 1/4

d

V V

1 - dShop 1 Shop 2

1/2

p(d) p(d)





The maximum pricethe firm can charge is now determined by the consumers at the end-points

of the market

The maximum pricethe firm can charge is now determined by the consumers at the end-points

of the market

Delivered price toconsumers at theend-points equals

their reservation price

Delivered price toconsumers at theend-points equals

their reservation price

Now what determines p(d)?

Now what determines p(d)?

The shops should bemoved outwards

The shops should bemoved outwards

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Location with two shops 3

Price Price

z = 0 z = 11/4

V V

3/4Shop 1 Shop 2

1/2

It follows thatshop 1 shouldbe located at

1/4 and shop 2at 3/4

It follows thatshop 1 shouldbe located at

1/4 and shop 2at 3/4

Price at eachshop is thenp* = V - t/4

Price at eachshop is thenp* = V - t/4

V - t/4 V - t/4

Profit at each shopis given by the

shaded area

Profit at each shopis given by the

shaded area

Profit is now (N, 2) = N(V - t/4 - c) – 2FProfit is now (N, 2) = N(V - t/4 - c) – 2F

c c

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Three shops

Price Price

z = 0 z = 1

V V

1/2

What if there are three shops?

What if there are three shops?

By the same argumentthey should be located

at 1/6, 1/2 and 5/6

By the same argumentthey should be located

at 1/6, 1/2 and 5/6

1/6 5/6Shop 1 Shop 2 Shop 3

Price at eachshop is now

V - t/6

Price at eachshop is now

V - t/6

V - t/6 V - t/6

Profit is now (N, 3) = N(V - t/6 - c) – 3FProfit is now (N, 3) = N(V - t/6 - c) – 3F

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Optimal number of shops

• A consistent pattern is emerging.• Assume that there are n shops.

• We have already considered n = 2 and n = 3.

• When n = 2 we have p(N, 2) = V - t/4

• When n = 3 we have p(N, 3) = V - t/6

• They will be symmetrically located distance 1/n apart.

• It follows that p(N, n) = V - t/2n

• Aggregate profit is then (N, n) = N(V - t/2n - c) – nF

How manyshops should

there be?

How manyshops should

there be?

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Optimal number of shops 2

Profit from n shops is (N, n) = (V - t/2n - c)N - nFand the profit from having n + 1 shops is:

*(N, n+1) = (V - t/2(n + 1)-c)N - (n + 1)F

Adding the (n +1)th shop is profitable if (N,n+1) - (N,n) > 0

This requires tN/2n - tN/2(n + 1) > F

which requires that n(n + 1) < tN/2F.

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An example

Suppose that F = $50,000 , N = 5 million and t = $1

Then tN/2F = 50

For an additional shop to be profitable we need n(n + 1) < 50.

This is true for n < 6

There should be no more than seven shops in this case: if n = 6 then adding one more shop is profitable.

But if n = 7 then adding another shop is unprofitable.

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Some intuition• What does the condition on n tell us?

• Simply, we should expect to find greater product variety when:– there are many consumers.

– set-up costs of increasing product variety are low.

– consumers have strong preferences over product characteristics and differ in these

• consumers are unwilling to buy a product if it is not “very close” to their most preferred product

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Empirical Application: Price Discrimination and Imperfect Competition

Although we have presented price discrimination and product design (versioning) issues in the context of a monopoly, these same tactics also play a role in more competitive settings of imperfect competition

Imagine a two-store setting again

Assume N customers distributed evenly between the two stores, each with maximum willingness to pay of V .

No transport cost—Half of the consumers always buys at nearest store. Other half always buys at cheapest store.

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Price Discrimination and Imperfect Competition 2

If both stores operated by a monopolist, set price = V.Cannot set it higher of there will be no customers.

If Store 1 cuts its price below V. It loses N/2 from all current customers

Setting it lower though gains nothing.What if stores operated by separate firms?

Imagine P1 = P2 = V. Store 1 serves N/4 price-sensitive customers and N/4 price-insensitive ones. The same is true for Store 2.

It gains N(V - )/4 by stealing all price-sensitive customers from Store 2

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MORAL 1: Both firms have a real incentive to cut price.

This ultimately proves self-defeating

Cutting their price does not increase their likelihood of shopping at a particular place. It just loses revenue.MORAL 2: Unlike the monopolist who sets the same price to everyone, these firms have an incentive to discriminate and so continue to charge a high price to loyal consumers while pricing low to others.

In equilibrium, both still serve N/2 customers but now do so at a price closer to cost.This is especially frustrating in light of the “brand-loyal” or price-insensitive customers

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The intuition then is that price discrimination may be associated with imperfect competition and become more prominent as markets get more competitive (but still less than perfectly competitive).

This idea is tested by Stavins (2001) with airline prices. Restrictions such as a required Saturday night stay-over or an advanced purchase serve as screening mechanism for price-sensitive customers. Hence, restrictions lead to lower ticket price.Stavins (2001) idea is that price reduction associated with flight restrictions will be small in markets that are not very competitive.

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Stavins (2001) looks at nearly 6,000 tickets covering 12 different city-pair routes in September, 1995. She finds strong support for the dual hypothesis that:

In highly competitive (low HHI) markets, a Saturday night restriction leads to a $253 price reduction but only a $165 reduction in less competitive ones.

a) passengers flying on a ticket with restrictions pay less;b) price reduction shrinks as concentration rises

In highly competitive (low HHI) markets, an Advance Purchase restriction leads to a $111 price reduction but only a $41 reduction in less competitive ones.

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Product Quality

25

Monopoly and product quality• Firms can, and do, produce goods of different qualities• Quality then is an important strategic variable• The choice of product quality determined by its ability to

generate profit; attitude of consumers to q uality• Consider a monopolist producing a single good

– what quality should it have?– determined by consumer attitudes to quality

• prefer high to low quality• willing to pay more for high quality• but this requires that the consumer recognizes quality• also some are willing to pay more than others for quality

Choosing quality

• Quality – vertical attributes of a product (ALL consumers agree that a product X is of higher quality than another product Y)

• Firms choose both quantity and quality• Profit maximization

– MR of an increment of quality is equal to its MC

• Key problem: asymmetric information

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Asymmetric information

• Lemons problem– How would you describe an equilibrium?

– Why is this a problem?

• Adverse selection• Moral hazard

– One side of a transaction has an incentive to change the terms of the exchange, unobserved by the other side

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Asymmetric information: types of goods

• Search goods: consumers have sufficient everyday knowledge or can accurately predict quality of a product BEFORE purchase

• Experience goods: quality can be determined by consumers only AFTER purchase

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Search goods

• Why manufacturers and service companies do not provide a moderate quality at a moderate price (why price/quality ratio rare works in real life)?

• Aim: increase profit by capturing consumer surplus (we assume imperfect competition here)

• Mechanism: quality discrimination (Highest quality level is chosen solely on grounds of independent profit maximization, but a firm needs preventing switching high-end consumers to low-end products)

– versioning / damaged goods

– widening the range of quality offered

29

Experience goods: strategies

• Reputation– Aim: repeat sales (customer loyalty)

– Reputation is transferrable across consumers (“word of mouth” as a promotion tool) and across markets (exploiting established reputation in new markets)

• Commitment– warranty (how to use for quality discrimination?)

– reputation (why restaurants in tourist areas are so bad?)

– Investment as a form of commitment: what is a signal of quality in this case?

30

Modeling commitment

• “Pure reputation model” (Shapiro, 1983)– Only new products are of unknown quality in the first period

– Consumers learn true quality after purchase and inform other potential buyers

– Decision: investment in reputation in the first period vs. earning a rent from selling high-quality products in all subsequent periods

– Assume that companies don’t “milk” their reputation

• “Advertising models” (Nelson, 1970, 1978)– Decision: price / advertising expenses combination to prevent

entry of low-quality producers

– Why “burning money” / noninformative advertising exists? (Warning: explanation for new experience goods only)

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Price and advertising as signals of quality

• Higher price – Higher Quality– Theory: Yes

• More advertising – High Quality– Theory: it depends (on the cost of information)

32

Empirical testing

• Caves and Greene (1996)– Source of information: Consumer Reports (ranking

products by objective characteristics – use as measures of quality)

– Method: correlation analysis

– Findings: • rank correlation coefficient for price-quality 0.38 for list

prices, 0.27 for transaction prices

• Is it a strong or weak correlation?

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Why weak?

• Price-quality correlation is higher for product categories that include more brands (greater scope for vertical differentiation)

• Lower for “convenience goods” (heavy advertising and frequent repeat purchase)

• Weakest for product that can use image advertising to build customer loyalty (horizontal differentiation)

34

Testing Nelson model

• Conclusion: quality signaling is not a particularly important determinant of advertising in consumer goods (median values of the rank correlations are close to zero)

• In some product categories correlation in very strong positive, in some – strong negative)– Advertising outlays tend to increase with quality for

innovative goods (providing information)

– Advertising is less correlated with quality of convenience goods (horizontal differentiation)

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Case: health care markets

36

37

Commodity Bundling and Tie-In Sales

38

Introduction• Firms often bundle the goods that they offer

– Microsoft bundles Windows and Explorer

– Office bundles Word, Excel, PowerPoint, Access

• Bundled package is usually offered at a discount

• Bundling may increase market power– GE merger with Honeywell

• Tie-in sales ties the sale of one product to the purchase of another

• Tying may be contractual or technological– IBM computer card machines and computer cards

– Kodak tie service to sales of large-scale photocopiers

– Tie computer printers and printer cartridges

• Why? To make money!

39

Bundling: an example• Two television stations offered two old Hollywood films

– Casablanca and Son of Godzilla

• Arbitrage is possible between the stations

• Willingness to pay is:

Station A

Station B

Willingness to pay for

Casablanca


Godzilla

$8,000

$7,000

$2,500

$3,000

How much canbe charged forCasablanca?

How much canbe charged forCasablanca?

$7,000

How much canbe charged for

Godzilla?

How much canbe charged for

Godzilla?

$2,500

If the films are soldseparately total

revenue is $19,000

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Bundling: an example 2

Station A

Station B


Casablanca


Godzilla

$8,000

$7,000

$2,500

$3,000

Total Willingness

to pay

$10,500

$10,000

Now supposethat the two films are

bundled and soldas a package

Now supposethat the two films are

bundled and soldas a package

How much canbe charged forthe package?

How much canbe charged forthe package?

$10,000

If the films are soldas a package total

revenue is $20,000

Bundling is profitable because it exploits

aggregate willingnesspay

41

Bundling • Extend this example to allow for mixed bundling:

offering products in a bundle and separately

42

Mixed bundling

• What should a firm actually do?

• There is no simple answer– mixed bundling is generally better than pure bundling

– but bundling is not always the best strategy

• Each case needs to be worked out on its merits

43

An ExampleFour consumers; two products; MC1 = $100, MC2 = $150

ConsumerReservation

Price for Good 1

Reservation Price for Good 2

Sum of Reservation

Prices

A

B

C

D

$50 $450 $500

$250 $275 $525

$300 $220 $520

$450 $50 $500

44

The example 2

Consider simplemonopoly pricing

Consider simplemonopoly pricing

Good 1: Marginal Cost $100

Price Quantity Total revenue Profit

$450$300

$250

$50

12

3

4

$450$600

$750

$200

$350$400

$450

-$200

$250

Good 2: Marginal Cost $150

Price Quantity Total revenue Profit

$450$275

$220

$50

12

3

4

$450$550

$660

$200

$300$200

$210

-$400

$450

Good 1 should be soldat $250 and good 2 at

$450. Total profitis $450 + $300

= $750

Good 1 should be soldat $250 and good 2 at

$450. Total profitis $450 + $300

= $750

45

The example 3

ConsumerReservation

Price for Good 1


Sum of Reservation

Prices

A

B

C

D

$50 $450 $500

$250 $275 $525

$300 $220 $520

$450 $50 $500

Now consider purebundling

Now consider purebundling

The highest bundleprice that can be

considered is $500

The highest bundleprice that can be

considered is $500All four consumers will buy

the bundle and profit is4x$500 - 4x($150 + $100)

= $1,000

All four consumers will buythe bundle and profit is

4x$500 - 4x($150 + $100)= $1,000

46

The example 4

ConsumerReservation

Price for Good 1


Sum of Reservation

Prices

A

B

C

D

$50 $450 $500

$250 $275 $525

$300 $220 $520

$450 $50 $500

Take the monopoly prices p1 = $250; p2 = $450 and a bundle price pB = $500

$500

$500

$250

$250

All four consumers buysomething and profit is

$250x2 + $150x2= $800

All four consumers buysomething and profit is

$250x2 + $150x2= $800

Now consider mixedbundling

Now consider mixedbundling

Can the seller improveon this?

Can the seller improveon this?

47

The example 5

ConsumerReservation

Price for Good 1


Sum of Reservation

Prices

A

B

C

D

$50 $450 $500

$250 $275 $525

$300 $220 $520

$450 $50 $500

Try instead the prices p1 = $450; p2 = $450 and a bundle price pB = $520

$450

$520

$520

$450

All four consumers buyand profit is $300 +

$270x2 + $350= $1,190

All four consumers buyand profit is $300 +

$270x2 + $350= $1,190

This is actuallythe best that the

firm can do

48

Bundling again• Bundling does not always work

• Mixed bundling is always more profitable than pure bundling

• Mixed bundling is always better than no bundling

• But pure bundling is not necessarily better than no bundling– Requires that there are reasonably large differences in

consumer valuations of the goods

• Bundling is a form of price discrimination

• May limit competition

49

Tie-in sales

• What about tie-in sales?– “like” bundling but proportions vary

– allows the monopolist to make supernormal profits on the tied good

– different users charged different effective prices depending upon usage

– facilitates price discrimination by making buyers reveal their demands

50

Tie-in sales 2• Suppose that a firm offers a specialized product – a

camera – that uses highly specialized film cartridges

• Then it has effectively tied the sales of film cartridges to the purchase of the camera– this is actually what has happened with computer printers and

ink cartridges

• How should it price the camera and film?– suppose also that there are two types of consumer, high-

demand and low-demand, with one-thousand of each type

– high demand P = 16 – Qh; low demand P = 12 - Ql

– the company does not know which type is which

51

Tie-in sales 3

• Film is produced competitively at $2 per picture– so film is priced at $2 per picture

• Suppose that the company leases its cameras– if priced so that all consumers lease then we can ignore

production costs of the camera• these are fixed at 2000c

• Now consider the lease terms

52

Tie-in sales: an example 2

High-DemandConsumers

Low-DemandConsumers

Demand: P = 16 - QDemand: P = 16 - Q Demand: P = 12 - QDemand: P = 12 - Q

$

Quantity Quantity

$16

16

$12

$

12

Recall that the film sells at $2

per picture

Recall that the film sells at $2

per picture

$2 $2

14

Low-demand consumers take 10

pictures


pictures

10

Consumer surplus for low-demand

consumers is $50


consumers is $50

$50

Consumer surplus for high-demand consumers is $98

Consumer surplus for high-demand consumers is $98

$98

High-demand consumers take 14

pictures


pictures

So the firm can set a lease charge of $50

to each type of consumer: it cannot

discriminate

So the firm can set a lease charge of $50

to each type of consumer: it cannot

discriminate

Profit is $50 from each low-demand and high-

demand consumer. Total profit is $100,000

Profit is $50 from each low-demand and high-

demand consumer. Total profit is $100,000

53

Tie-in sales example 3

• This is okay but there may be room for improvement

• Redesign the camera to tie the camera and the film– technological change that makes the camera work only with

the firm’s film cartridge

• Suppose that the firm can produce film at a cost of $2 per picture

• Implement a tying strategy that makes it impossible to use the camera without this film

54


$16

16

$12

12


Low-DemandConsumers


$

Quantity Quantity

$

$2 $2

12


pictures


pictures

8


consumers is $32


consumers is $32

Each high-demand consumer will lease the camera at $32

Each high-demand consumer will lease the camera at $32

Aggregate profit is now $48,000 + $56,000 =

$104,000


$104,000

$4 $4$32

Lease the camera at $32. Profit is $32 plus $16 in film

profits = $48

Lease the camera at $32. Profit is $32 plus $16 in film

profits = $48

$16

$32

Profit is $32 plus $24 in film profits =

$56

Profit is $32 plus $24 in film profits =

$56

$24


pictures


pictures

Tying increases thefirm’s profit

Tying increases thefirm’s profit

55


• Why does tying increase profits?– high-demand consumers are offered a quantity discount

under both the original and the tied lease arrangement

– but tying solves the identification and arbitrage problems• film exploits its monopoly in film supply

• high-demand consumers are revealed by their film purchases

• quantity discount is then used to increase profit• arbitrage is not an issue: both types of consumers pay the

same lease and the same unit price for film

56


• Can the firm do even better?

• Redesign the camera so that the film cartridge is integral– offer two types of integrated camera/film package: high capacity

and low capacity

– what capacities?

• This is similar to second-degree price discrimination– design two cameras with socially efficient capacities: 10 picture

and 14 picture

– lease these as integrated packages

57


$16

16

$12

12


Low-DemandConsumers


$

Quantity Quantity

$

$2 $2

Low-demand consumers will pay up to $70 to lease

the 10-picure camera

Low-demand consumers will pay up to $70 to lease

the 10-picure camera


$108,000


$108,000

$70

101410

12

High-demand consumers get $40 consumer surplus by leasing the 10-

picure camera

High-demand consumers get $40 consumer surplus by leasing the 10-

picure camera

$40

$70

$16

So high-demand consumers can be

charged $86 to lease the 14-picture

camera

So high-demand consumers can be

charged $86 to lease the 14-picture

camera

58

Network externalities

• Product complementarities can generate network effects– Windows and software applications

• substantial economies of scale

• strong network effects

– leads to an applications barrier to entry• new operating system will sell only if applications are written for it

• but…

• So product complementarities can lead to monopoly power being extended

59

Anti-trust and bundling

• The Microsoft case is central– accusation that used power in operating system (OS) to gain

control of browser market by bundling browser into the OS

– need\ to show• monopoly power in OS

• OS and browser are separate products with no need to be bundled

• abuse of power to maintain or extend monopoly position

– Microsoft argued that technology required integration

– further argued that it was not “acting badly”• consumers would benefit from lower price because of the

complementarity between OS and browser

60

Microsoft and Netscape

• Complementarity products– so merge?

– what if Netscape refuses?

– then Microsoft can develop its own browser

– MC ≈ 0 so competition in the browser market drives price close to zero

– but then get the outcome of merger firm through competition

• So Microsoft is not “acting badly”

• But– JAVA allows applications to be run on Internet browsers

– Netscape then constitutes a threat

– need to reduce their market share

61

And now…• This view gained more force & support in Europe

– bundling of Media Player into Windows– Competition Directorate found against Microsoft

• Microsoft Appealed• Microsoft finally lost its appeal in September, 2007

– Result: Microsoft ordered to stop bundling and forced to pay fine of €497 (finally settled in October, 2007)

– Some economists upset by this decision arguing that as price discrimination, bundling often expands the market, AND also that bundling/tying can reflect competition and not just market power

62

Competitive Bundling/Tying

• Bundling and tying are very commonly observed phenomena– Perhaps too commonly observed to be just the

outcome of monopoly power

– Is there a way to understand competitive bundling?

• Yes! Salinger and Evans (2005) and Evans (2006)

• It may well be the case that the structure of demand and the nature of scope and scale economies force competitive firms to bundle tie their goods

63

Competitive Bundling/Tying 2• Consider the table on the next slide and assume consumer

willingness to pay is $20 for most preferred option– Competitive firm can’t offer pain reliever & decongestant

separately, To do so incurs • total fixed cost of $600• Marginal cost of $4• Breakeven price = $6

– 50 by pain relief alone and pay $6 per unit– 50 by decongestant alone and pay $6 per unit– 100 buy both and pay $12 per combined unit

• Total Revenue = $1800; Total cost = $600 + $4x150 + $4x150 = $1800

– Rival could sell bundled product for $10 and steal all 100 customers interested in joint goods who now pay $12

64

Competitive Bundling/Tying 3 Product

Pain Relief Decongestant Bundle

Demand 50 50 100Costs

Fixed Cost $300 $300 $300Marginal Cost $4 $4 $7

Feasible Prices

Separate Goods $6 $6 -----Pure Bundling ---- ---- $8.50

Mixed Bundling $10 $10 $10Bundle + Good 1 $10 ---- $9Bundle + Good 2 ---- $10 $9

$8.50 is lowest feasible price and is

achieve by only offering the bundled

product

Moral: competitive pressure may be the

underlying reason for much bundling

65

Antitrust and tying arrangements• Tying arrangements have been the subject of extensive

litigation• Current policy

– tie-in violates antitrust laws if• there exists distinct products: tying product & tied one• firm tying the products has sufficient market power in

the tying market to force purchase of the tied good• tying arrangement forecloses or has the potential to

foreclose a substantial volume of trade• As time passes, approach is more and more of a rule-of-

reason standard with increasing recognition that whether price discrimination or competitive pressure is the reason, bundling/tying is often welfare-improving

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Product Variety and Quality

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