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Leveraging Monopoly Power by Degrading Interoperability: Theory and Evidence from Computer Markets

  • Christos Genakos
  • Kai-Uwe Kühn
  • John Van Reenen

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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File URL: http://www.nber.org/papers/w17172.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17172.

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Date of creation: Jun 2011
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Handle: RePEc:nbr:nberwo:17172
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  1. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
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  8. Bresnahan, Timothy F & Greenstein, Shane, 1999. "Technological Competition and the Structure of the Computer Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 1-40, March.
  9. Steve Berry & Oliver Linton & Ariel Pakes, 2000. "Limit theorems for estimating the parameters of differentiated product demand systems," LSE Research Online Documents on Economics 2032, London School of Economics and Political Science, LSE Library.
  10. 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.
  11. 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.
  12. 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.
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