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Why Lever into a Zero‐Profit Industry: Tying, Foreclosure, and Exclusion

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  • Patrick DeGraba

Abstract

This paper considers the incentives of a firm with power in a market for one good to tie in the sale of a complementary good even though the complementary good is produced in a zero profit market. If the zero‐profit price of the tied good is greater than the marginal cost (which occurs for example when the technology is characterized by a fixed cost and a constant marginal cost), a firm will fie in order to increase the sales of the complementary good, which at the margin is profitable. We show that such tying will lower the effective prices paid by customers and increase welfare. This incentive exists if the firm with market power is a monopolist or one of several competing oligopolists.

Suggested Citation

  • Patrick DeGraba, 1996. "Why Lever into a Zero‐Profit Industry: Tying, Foreclosure, and Exclusion," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 433-447, September.
    • Handle: RePEc:bla:jemstr:v:5:y:1996:i:3:p:433-447
    DOI: 10.1111/j.1430-9134.1996.00433.x
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    References listed on IDEAS

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    1. Chen, Zhiqi & Ross, Thomas W., 1999. "Refusals to deal and orders to supply in competitive markets," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 399-417, April.
    2. repec:bla:jemstr:v:2:y:1993:i:4:p:593-614:a is not listed on IDEAS
    3. Chen, Zhiqi & Ross, Thomas W, 1993. "Refusals to Deal, Price Discrimination, and Independent Service Organizations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(4), pages 593-614, Winter.
    4. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    5. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
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    Cited by:

    1. Geoffrey G. Parker & Marshall W. Van Alstyne, 2005. "Two-Sided Network Effects: A Theory of Information Product Design," Management Science, INFORMS, vol. 51(10), pages 1494-1504, October.
    2. Margaret E. Slade, 1998. "The Leverage Theory of Tying Revisited: Evidence from Newspaper Advertising," Southern Economic Journal, John Wiley & Sons, vol. 65(2), pages 204-222, October.
    3. Rosenkranz, Stephanie & Schmitz, Patrick W., 2001. "Vertikale Unternehmenskooperationen," MPRA Paper 6930, University Library of Munich, Germany.
    4. Mark Shanley & Margaret Peteraf, 2004. "Vertical group formation: A social process perspective," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 25(6-7), pages 473-488.

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