Digital Convergence, Pricing Strategies and Firms' Profits in the Telecommunication and Entertainment Media Industry

Digital convergence of telecommunication and entertainment media services drove former network monopolists into a prisoner's dilemma forcing them to enter each others markets. In this reciprocal duopoly firms now offer their services in a bundle, commonly known as triple play. I investigate whether bundling is indeed a profitable pricing strategy for these services and if it can facilitate market power leverage. I will show that bundle pricing serves as a powerful leverage device for one firm in this industry. This is achieved through a quality sorting effect accruing as the firms wish to shield themselves from increased price competition in the market for bundles. Thereby, one firm emerges as the high-quality, high-profit provider in both markets, whereas the competing firm has to settle for low qualities and profits.