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Given the robust competitive landscape for video content, the most plausible explanation of bundling by BDUs concerns price discrimination. Bundling can assist sellers in extracting consumer surplus. Buyers have different preferences, and thus different demand, for different products. However, variation across buyers in their willingness to pay for a particular product does not necessarily imply variation across buyers in their willingness to pay for a bundle of products. Just as diversification in a stock portfolio reduces variance in the portfolio’s return, bundling can reduce the variance across consumers in their willingness to pay. This allows the seller to charge a price for the bundle that better maximizes its profits.

Competition law in Canada has moved in exactly this direction, with amendments to the Competition Act in 2009 that not only decriminalized price discrimination, but removed reference to the practice altogether.

Competition will affect the ability of BDUs to profitably bundle regardless of regulation. If consumers dislike bundles, they will increasingly be able to shift with little cost to alternatives on the Internet such as Netflix, or channel-affiliated websites. Indeed, there already is evidence of the BDUs adopting strategies to respond to competition. In Quebec, for example, Videotron offers the option of relatively narrow bundles of channels to its subscribers. In addition, Rogers and Shaw recently announced the creation of a streaming service similar to Netflix, called Shomi. Establishing an elaborate regulatory regime to deal with a practice that will soon be subjected to even more intense competition would be a mistake.

Lawson Hunter is Counsel, Stikeman Elliot, Edward Iacobucci is Osler Chair in business law, faculty of law, University of Toronto and Michael Trebilcock is professor of law and economics, faculty of law, University of Toronto. Excerpted from the C.D. Howe study “Let the Market Decide: The Case Against Mandatory Pick-and-Pay.”