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 incumbentis 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. (C) 2006 Elsevier B.V. All rights reserved.