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Tying in evolving industries, when future entry cannot be deterred

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  • Fumagalli, Chiara
  • Motta, Massimo

Abstract

We show that the incentive to engage in exclusionary tying (of two complementary products) may arise even when tying cannot be used as a defensive strategy to protect the incumbent’s dominant position in the primary market. By engaging in tying, an incumbent firm sacrifices current profits but can exclude a more efficient rival from a complementary market by depriving it of the critical scale it needs to be successful. In turn, exclusion in the complementary market allows the incumbent to be in a favorable position when a more efficient rival will enter the primary market, and to appropriate some of the rival’s efficiency rents. The paper also shows that tying is a more profitable exclusionary strategy than pure bundling, and that exclusion is the less likely the higher the proportion of consumers who multi-home.

Suggested Citation

  • Fumagalli, Chiara & Motta, Massimo, 2020. "Tying in evolving industries, when future entry cannot be deterred," International Journal of Industrial Organization, Elsevier, vol. 73(C).
  • Handle: RePEc:eee:indorg:v:73:y:2020:i:c:s0167718719300955
    DOI: 10.1016/j.ijindorg.2019.102567
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    References listed on IDEAS

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    1. 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.
    2. Dennis W. Carlton & Michael Waldman, 2002. "The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 194-220, Summer.
    3. Dennis W. Carlton & Michael Waldman, 2012. "Upgrades, Switching Costs and the Leverage Theory of Tying," Economic Journal, Royal Economic Society, vol. 122(561), pages 675-706, June.
    4. Chiara Fumagalli & Massimo Motta, 2018. "Dynamic Vertical Foreclosure," BAFFI CAREFIN Working Papers 1899, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
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    6. Jay Pil Choi, 1996. "Preemptive R&D, Rent Dissipation, and the "Leverage Theory"," The Quarterly Journal of Economics, Oxford University Press, vol. 111(4), pages 1153-1181.
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    More about this item

    Keywords

    Inefficient foreclosure; Tying; Scale economies; Network externalities;
    All these keywords.

    JEL classification:

    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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