Working Paper: CEPR ID: DP14031
Authors: Chiara Fumagalli; Massimo Motta
Abstract: We show that the incentive to engage in exclusionary tying (of two complementary products) may arise even when the incumbent's dominant position in the primary market cannot be protected. 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.
Keywords: Inefficient foreclosure; Tying; Scale economies; Network externalities
JEL Codes: K21; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| incumbent firm engages in exclusionary tying (L12) | prevents more efficient rival from achieving critical scale in secondary market (D43) |
| tying (Y20) | incumbent's profitability (L21) |
| proportion of consumers who multihome (D16) | likelihood of exclusion (C52) |
| entry costs for rivals are high and share of multihomers is low (L13) | incentives for tying (L14) |