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Hayek vs. Stiglitz - The Economics of Bundling. "Selling items in a package rather than separately is known as bundling. Bundling is viewed with suspicion by politicians, and it has long been considered an activity that justifies interference in markets. For example, in 1948, the Supreme Court banned "block booking," in which movie studios sold movie theaters movies as a package .. At least since [George] Stigler's critique of the Supreme Court decision on "block booking," economists have known that sellers do not engage in bundling as a way of forcing consumers to pay for what they do not want. However, the economic theory of why sellers do engage in bundling is unsettled ..

In the real world, competition is almost always messy. This leads to what I call the conflict between Hayekians and Stiglitzians. Friedrich Hayek believed that local knowledge is important, so that messy markets should be left alone. Joseph Stiglitz believes that economic theory of imperfect markets is important, so that government should intervene. Stiglitzians look for opportunities to fine tune the market whenever it departs from the theoretical model of perfect competition. In theoretically perfect markets, there is no bundling. Stiglitzians can rationalize government intervention in any situation where there is bundling. In practice, however, their choices are somewhat arbitrary. The Europeans recently decided that Microsoft is not allowed to bundle a media player with its software, although nobody stops automobile manufacturers from bundling media players (car stereos) with their products. In theory, the government could intervene everywhere it finds bundling. It could stop stores from offering two-for-one specials. It could ban frequent-flyer miles, which are a form of bundling. It could force cable TV operators to offer service by-the-channel instead of as a package, or by-the-minute instead of by-the-month. It could force cable TV operators to offer service by-the-minute, by-the-channel, for that matter. A Stiglitzian economist could come up with a theory to justify such interventions, based on analysis that fits some features of a market while leaving out others. However, it is impossible for an economist to have a complete picture of the industry's cost structure, the tastes of consumers, potential substitutes, and potential innovations -- all of which need to be taken into account in order to determine the effect of bundling. The Hayekian view is that it is better to allow local knowledge to be applied in a market with messy competition than to ask a central planner to try and dictate outcomes based on his own incomplete information .. ". More Arnold Kling. Posted by Greg Ransom | TrackBack