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Why Tie a Product Consumers Do Not Use?

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  • Dennis W. Carlton
  • Joshua S. Gans
  • Michael Waldman

Abstract

We provide an explanation for tying not based on any of the standard arguments: efficiency, price discrimination, or exclusion. In our analysis a monopolist ties a complementary good to its monopolized good, but consumers do not use the tied good. The tie is profitable because it shifts profits from a complementary good rival to the monopolist. We show such tying is socially inefficient, but arises only when the tie is socially efficient in the absence of the rival. We relate this form of tying to several examples, discuss how it can also arise under competition, and explore its antitrust implications. (JEL D42, K21, L12, L25, L40)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 2 (2010)
Issue (Month): 3 (August)
Pages: 85-105

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Handle: RePEc:aea:aejmic:v:2:y:2010:i:3:p:85-105

Note: DOI: 10.1257/mic.2.3.85
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References

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  1. Joseph Farrell and Michael L. Katz., 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Economics Working Papers E00-286, University of California at Berkeley.
  2. Dennis W. Carlton & Michael Waldman, 2005. "Tying, Upgrades, and Switching Costs in Durable-Goods Markets," NBER Working Papers 11407, National Bureau of Economic Research, Inc.
  3. Whinston, Michael D, 1990. "Tying, Foreclosure, and Exclusion," American Economic Review, American Economic Association, vol. 80(4), pages 837-59, September.
  4. Michael D. Whinston, 2001. "Exclusivity and Tying in U.S. v. Microsoft: What We Know, and Don't Know," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 63-80, Spring.
  5. Dennis W. Carlton & Michael Waldman, 1998. "The Strategic Use Of Tying To Preserve And Create Market Power In Evolving Industries," University of Chicago - George G. Stigler Center for Study of Economy and State 145, Chicago - Center for Study of Economy and State.
  6. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 475-98, August.
  7. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  8. Bolton, Patrick & Whinston, Michael D, 1993. "Incomplete Contracts, Vertical Integration, and Supply Assurance," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 121-48, January.
  9. Dennis W. Carlton & Joshua S. Gans & Michael Waldman, 2007. "Why Tie A Product Consumers Do Not Use?," NBER Working Papers 13339, National Bureau of Economic Research, Inc.
  10. Gans, Joshua S., 2011. "Remedies for tying in computer applications," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 505-512, September.
  11. Carbajo, Jose & de Meza, David & Seidmann, Daniel J, 1990. "A Strategic Motivation for Commodity Bundling," Journal of Industrial Economics, Wiley Blackwell, vol. 38(3), pages 283-98, March.
  12. Barry Nalebuff, 2004. "Bundling as an Entry Barrier," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 159-187, February.
  13. Chen, Yongmin, 1997. "Equilibrium Product Bundling," The Journal of Business, University of Chicago Press, vol. 70(1), pages 85-103, January.
  14. Choi, Jay Pil & Stefanadis, Christodoulos, 2001. "Tying, Investment, and the Dynamic Leverage Theory," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 52-71, Spring.
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Cited by:
  1. Jihui Chen, 2011. "Do Exclusivity Arrangments Harm Consumers?," Working Paper Series 20111001, Illinois State University, Department of Economics.
  2. Joshua S. Gans, 2011. "When Is Static Analysis a Sufficient Proxy for Dynamic Considerations? Reconsidering Antitrust and Innovation," Innovation Policy and the Economy, University of Chicago Press, vol. 11(1), pages 55 - 78.
  3. Hurkens, Sjaak & Jeon, Doh-Shin & Menicucci, Domenico, 2013. "Dominance and Competitive Bundling," TSE Working Papers 13-423, Toulouse School of Economics (TSE).
  4. Gans, Joshua S., 2011. "Remedies for tying in computer applications," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 505-512, September.
  5. Joao Macieira & Pedro Pereira & Joao Vareda, 2013. "Bundling Incentives in Markets with Product Complementarities: The Case of Triple-Play," Working Papers 13-15, NET Institute.
  6. Dennis W. Carlton & Joshua S. Gans & Michael Waldman, 2010. "Why Tie a Product Consumers Do Not Use?," American Economic Journal: Microeconomics, American Economic Association, vol. 2(3), pages 85-105, August.
  7. Claudio Lucarelli & Sean Nicholson & Minjae Song, 2010. "Bundling Among Rivals: A Case of Pharmaceutical Cocktails," NBER Working Papers 16321, National Bureau of Economic Research, Inc.
  8. Gans, Joshua S., 2012. "Mobile application pricing," Information Economics and Policy, Elsevier, vol. 24(1), pages 52-59.

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