Working Paper: CEPR ID: DP8502
Authors: Christos D. Genakos; Kaiuwe Khn; John Van Reenen
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.
Keywords: Antitrust; Demand Estimation; Foreclosure; Interoperability
JEL Codes: D43; L1; L4; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monopolist reduces interoperability (L15) | Increases market power in the server market (L12) |
| Monopolist reduces interoperability (L15) | Affects demand for its own PC operating system (L17) |
| Reduced interoperability (L15) | Enhances market share in the server market (L17) |
| Lowering quality of rival servers (L15) | Increases own server prices (D49) |
| Lowering quality of rival servers (L15) | Extracts surplus from customers with inelastic demand for PCs (D43) |
| Monopolist's trade-off between gaining server share and losing PC sales (D42) | Incentives to degrade interoperability (L15) |