International Review of Law and Economics 26 (2006) 162–179 A theory of commodity bundling in final product markets: Professor Hirshleifer meets Professor Becker  Robert E. McCormick a , William F. Shughart II b,* , Robert D. Tollison a a John E. Walker Department of Economics, Clemson University, 222 Sirrine Hall, Clemson, SC 29634, USA b Department of Economics, University of Mississippi, P.O. Box 1848, University, MS 38677, USA Abstract This article advances a theory of commodity bundling as an alternative to forward integration in household production. We argue, in particular, that a producer having market power over the sale of a final consumption good will sometimes find it profitable to bundle that good with one or more complements – and to sell the preassembled package to consumers at a lump-sum price – for the same reason that a monopolist of an intermediate input profits from vertically integrating his supply chain. In both cases, substitution against a monopoly-priced input is avoided and competitively determined input-price ratios are restored downstream. Combining the theories of transfer pricing and household production also suggests that the not uncommon practice of “mixed bundling”, whereby sellers offer the same final consumption good both bundled and unbundled, can be explained as a way of segmenting consumers into groups based on differences in their skills, tastes, and preferences for home production.  We benefited from comments by Fred McChesney, Hilary Shughart and Michael Reksulak, the last of whom also supplied upstream vertically integrated research assistance to this effort. William Dougan, Michael Maloney, Raymond Sauer and other participants in a Fall 2002 economics department seminar at Clemson University helped in clarify our thinking; the suggestions of the editor and two anonymous referees improved the paper considerably. As is customary except in certain legal environments, these input suppliers are hereby held blameless for the final product. * Corresponding author. E-mail address: shughart@olemiss.edu (W.F. Shughart II). 0144-8188/$ – see front matter © 2006 Elsevier Inc. All rights reserved. doi:10.1016/j.irle.2006.08.001