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Leveraging Monopoly Power by Degrading Interoperability: Theory and evidence from computer markets

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Listed author(s):
  • Genakos, Christos D.
  • Kühn, Kai-Uwe
  • Van Reenen, John

Abstract

When will a monopolist have incentives to foreclose a complementary market by degrading compatibility/interoperability of his products with those of rivals? We develop a framework where leveraging extracts more rents from the monopoly market by 'restoring' second degree price discrimination. In a random coefficient model with complements we derive a policy test for when incentives to reduce rival quality will hold. Our application is to Microsoft’s strategic incentives to leverage market power from personal computer to server operating systems. We estimate a structural random coefficients demand system which allows for complements (PCs and servers). Our estimates suggest that there were incentives to reduce interoperability which were particularly strong at the turn of the 21st Century.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8502.

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Date of creation: Aug 2011
Handle: RePEc:cpr:ceprdp:8502
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Keywords: anti-trust; demand estimation; foreclosure; interoperability;

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Find related papers by JEL classification:
  • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
  • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
  • L4 - Industrial Organization - - Antitrust Issues and Policies
  • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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  1. B. Douglas Bernheim & Michael D. Whinston, 1998. "Exclusive Dealing," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 64-103, February.
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  8. Bernard Reddy & David Evans & Albert Nichols & Richard Schmalensee, 2001. "A Monopolist Would Still Charge More for Windows: A Comment on Werden's Reply," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 18(3), pages 273-274, May.
  9. R. Preston McAfee & John McMillan & Michael D. Whinston, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 371-383.
  10. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
  11. Inseong Song & Pradeep K. Chintagunta, 2006. "Measuring Cross-Category Price Effects with Aggregate Store Data," Management Science, INFORMS, vol. 52(10), pages 1594-1609, October.
  12. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769, March.
  13. Jaison R. Abel & Ernst R. Berndt & Alan G. White, 2007. "Price Indexes for Microsoft," NBER Chapters,in: Hard-to-Measure Goods and Services: Essays in Honor of Zvi Griliches, pages 269-289 National Bureau of Economic Research, Inc.
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Cited by:

  1. Laura Nurski, 2012. "Net Neutrality, Foreclosure and the Fast Lane: An empirical study of the UK," Working Papers 12-13, NET Institute.
  2. Kai-Uwe Kühn & Svend Albæk & Miguel Mano, 2011. "Economics at DG Competition, 2010–2011," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 39(4), pages 311-325, December.

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