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A Leverage Theory of Tying in Two-Sided Markets


  • CHOI, Jay Pil
  • JEON, Doh-Shin


Motivated by the recent antitrust investigations concerning Google, we develop a leverage theory of tying in two-sided markets. In a setting where the "one monopoly profit result" holds otherwise, we uncover a new channel through which tying allows a monopolistic firm in one market to credibly leverage its monopoly power to another competing market if the latter is two-sided. In the presence of the nonnegative price constraint, tying provides a mechanism to circumvent the constraint in the tied product market without inviting an aggressive response by the rival firm. We identify conditions under which tying in two-sided markets is promotable and explore its welfare implications. In addition, we show that our model can be applied more widely to any markets in which sales to consumers in one market can generate additional revenues that cannot be competed away due to non-negative price constraints.

Suggested Citation

  • CHOI, Jay Pil & JEON, Doh-Shin, 2016. "A Leverage Theory of Tying in Two-Sided Markets," Discussion paper series HIAS-E-37, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
  • Handle: RePEc:hit:hiasdp:hias-e-37

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    References listed on IDEAS

    1. Amelio, Andrea & Jullien, Bruno, 2012. "Tying and freebies in two-sided markets," International Journal of Industrial Organization, Elsevier, vol. 30(5), pages 436-446.
    2. Hurkens, Sjaak & Jeon, Doh-Shin & Menicucci, Domenico, 2016. "Leveraging Dominance with Credible Bundling," CEPR Discussion Papers 11304, C.E.P.R. Discussion Papers.
    3. Doh-Shin Jeon & Domenico Menicucci, 2006. "Bundling Electronic Journals and Competition among Publishers," Journal of the European Economic Association, MIT Press, vol. 4(5), pages 1038-1083, September.
    4. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 645-667, September.
    5. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-328, Summer.
    6. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-841, August.
    7. Doh-Shin Jeon & Domenico Menicucci, 2012. "Bundling and Competition for Slots," American Economic Review, American Economic Association, vol. 102(5), pages 1957-1985, August.
    8. Joseph Farrell & Nancy T. Gallini, 1988. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," The Quarterly Journal of Economics, Oxford University Press, vol. 103(4), pages 673-694.
    9. 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 283-298, March.
    10. Mark Armstrong & Julian Wright, 2007. "Two-sided Markets, Competitive Bottlenecks and Exclusive Contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 32(2), pages 353-380, August.
    11. 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.
    12. 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.
    13. repec:oup:jcomle:v:11:y:2015:i:2:p:365-400. is not listed on IDEAS
    14. Michael Waldman, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 273-283.
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    Cited by:

    1. Etro, Federico, 2016. "Research in economics and industrial organization," Research in Economics, Elsevier, vol. 70(4), pages 511-517.
    2. Andre Boik, 2018. "Prediction and Identification in Two-Sided Markets," CESifo Working Paper Series 6857, CESifo Group Munich.

    More about this item


    Tying; Leverage of monopoly power; Two-sided markets; Zero pricing; Non-negative pricing constraint;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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