In Korea, bundling of telecommunications services by dominant firms is prohibited. This prohibition is to prevent a firm with market power in one market from leveraging that power into a second market in which it would otherwise face competition. Recently, however, there has been a significant increase in the number and range of bundled packages in telecommunications, being supplied by dominant local carriers in the US, Europe, and other countries including Australia and New Zealand. This trend implies that bundling by dominant firms can be welfare improving rather than anti-competitive.

This paper is to investigate economic effects of bundling in telecommunications and to analyze its impacts on social welfare. In particular, this paper examines firms' incentives to form strategic allies (or integrate) in order to provide bundled services when there are two firms each in the fixed and mobile markets. This paper also investigates which bundling strategies are chosen by the firms if they decided to sell bundled services and furthermore derives the optimal policy choice available to the government, based on welfare analysis.

The study finds that no firm has a unilateral incentive to integrate across markets in order to follow pure components pricing when the access charge is above the marginal cost since, then, it lowers their joint profit. It is shown, however, that a group of firms has an incentive to integrate and to choose pure bundling while the other two firms prefer to remain independent. However, the level of social welfare in this case is lower than before. The study shows that it is optimal for the government to prohibit pure bundling but to allow mixed bundling since, then, all the firms prefer to integrate across markets and to choose mixed bundling, and, as a result, the welfare level increases provided that consumers get extra surplus from consuming the bundled services.