The Role of Cost in Designing Product Offerings

Competition Policy and Antitrust

Article Snapshot

Author(s)

David S. Evans, Laura Gee and Lubomira Ivanova

Source

Summary

This paper looks at how costs affect business decisions about products.

Policy Relevance

Understanding why businesses make complex decisions help policymakers avoid harming consumers.

Main Points

  • A firm must choose whether to offer only product A, whether to offer A and B, whether to offer A only with B (“tying”), or whether to offer a discount for buying A and B together (“bundling”).

 

  • Different types of costs and patterns of consumer demand affect companies’ decision about product offerings.

 

  • Products A and B are sold separately when there is little demand for A and B together, or when combining A and B makes the product too expensive (e.g. screws and screwdrivers).

 

  • Firms offer A, B, and A combined with B when there is demand for both, and combining the products reduces costs (e.g. cold medicines).

 

  • Firms offer only A combined with B:
    • when fixed costs are high and consumers demand both (foreign plug adaptors)
    • or when costs are moderate and there is less demand for one product sold separately (shoes)
    • or when demand for one good is low while demand for the bundle and the other separate goods are high (assorted-size bandages)

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