Defensive Leveraging in Antitrust

Abstract:     
Antitrust commentators have struggled to explain why firms engage in leveraging behavior and whether leveraging damages competition. The literature has focused on whether a firm with a monopoly in one market can use leveraging to gain additional monopoly profit from a second market. This article introduces the theory of defensive leveraging. According to the theory, leverage behavior should not be analyzed solely as an attempt to reap additional monopoly profit from a second market. Rather, it may be an attempt to prevent erosion of the primary monopoly. The article analyzes the life cycle of a monopoly and explains how defensive leveraging helps a monopolist extend the life of its primary monopoly by preventing splintering and next generation substitution. The article then applies defensive leveraging theory to three market examples: Microsoft's behavior in the market for Internet browsers, competition between physician and nonphysician health care providers, and Eli Lilly's behavior in the market for cephalosporins.

Accepted Paper Series