Green Unbundling and Market Entry: Environmental Strategy in Complementary Goods Markets

Abstract

This paper examines the strategic unbundling of complementary goods by an incumbent firm operating under environmental externalities, using recent decisions by Apple and Samsung to exclude chargers from smartphone packages as a motivating example. Challenging the conventional view that bundling deters entry in complementary goods markets, we show that incumbents may instead find it optimal to unbundle products to enhance their environmental reputation while accommodating entry.

We develop a game-theoretic model of a two-good complementary market in which production generates environmental harm, internalised through Pigouvian taxes. Consumers differ in both their valuation of consuming the goods jointly and their pre-existing ownership of one component. Our analysis shows that when all firms are subject to the same environmental regulation, mixed bundling is the profit-maximising strategy and aligns with the first-best social welfare outcome. However, when low-cost entrants operate from jurisdictions without equivalent environmental regulation, the incumbent has incentive to unbundle, accommodate such entry, and reduce its own emissions by ceasing production of the complementary good. While this strategy may lower the firm’s reported environmental footprint, it leads to greater global environmental damage as imports escape regulation. We quantify this trade-off and assess policy interventions, such as border-adjusted carbon taxes and alternative tax schemes, that can better align private incentives with global welfare in the presence of regulatory asymmetries.

Key words: bundling, complementary goods, externalities, market entry