Living Economics

In July 2001, the European Commission rejected the $42 billion merger between GE with Honeywell for potential anticompetitive bundling of GE aircraft engines and Honeywell avionics. The merger was approved by the US Justice Department. But because of the large market presence of the two firms in the European market, permission had to be sought from the European Commission.

Usually, mergers between like firms in the same business (horizontal merger) are blocked by regulatory agencies because the merged firms would be large enough to raise price due to weaker competition. In the case of GE and Honeywell, the merger was believed to be able to disadvantage their competitors by discounting their bundled products.

In theory, a firm that bundles its complementary products can gain market share and earn higher profit by equating the marginal revenue of the bundle to the marginal cost of the bundle. Because it is the profit of the bundle that needs to be maximized, the bundler will price the bundle in such a way that more of bundled components could be sold. On the other hand, firms offering only separate components will price the components to maximize profit without any concern whether the price of its components might be too high to adversely affect the sale of complementary components of other firms. Therefore, the price of bundles is usually lower than the summed price of the separately sold components. Thus, the bundler might put the separate component makers at a pricing disadvantage and out of business eventually.

The objection of the European Commission was thus based on the anti-competitive potential of such pricing efficiencies arising from bundling complementary goods.

The potential of bundlers out-competing separate component makers is real. For example, the Microsoft Office suite is sold at a considerable discount to the separate Office applications. And the interoperability of the Office suite is much tighter than that between similar components from non-bundlers. Today, it is hard to find viable separate application rivals to the Office applications.

But in the business of aircraft engines and avionics where price negotiation rather than fixed pricing is the norm, the pricing efficiencies of bundling may be less than what the theory claims. In other words, the prices of separate components might already be negotiated to where the efficient bundle price could be.