Working Paper: NBER ID: w17172
Authors: Christos Genakos; Kai-Uwe 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: Monopoly; Interoperability; Market Power; Price Discrimination; Antitrust
JEL Codes: D43; L1; L2; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Degradation of interoperability by Microsoft (L15) | Demand for rival server operating systems (L17) |
| Degradation of interoperability by Microsoft (L15) | Market share of Microsoft in server market (L17) |
| Market share of Microsoft in server market (L17) | Pricing of Microsoft's server operating system (D49) |
| Degradation of interoperability by Microsoft (L15) | Pricing strategies of Microsoft (D49) |
| Demand for rival server operating systems (L17) | Competition in the server market (L17) |