Bundled Discounts, Leverage Theory, and Downstream Competition

Posted: 16 Jun 2008

See all articles by Abraham L. Wickelgren

Abraham L. Wickelgren

University of Texas at Austin - School of Law; University of Texas at Austin - Center for Law, Business, and Economics

Date Written: Fall 2007

Abstract

Under plausible circumstances, a monopolist in one market can use its control of prices in that market to force competing downstream buyers to sign tying contracts that will lever its monopoly into another market. Specifically, the monopolist of the tying good can place each downstream buyer in a prisoner's dilemma by offering them more favorable pricing on the tying good if they sign a requirements-tying contract covering the tied good. Since a buyer benefits on receiving more favorable pricing on the tying good and the competitors do not, and suffers if the competitors receive more favorable pricing on the tying good and the buyer does not, buyers will sign the tying contract even when they would earn higher profits if they all refused to sign. This enables a monopolist in one market to inefficiently exclude an entrant in another market.

Suggested Citation

Wickelgren, Abraham L., Bundled Discounts, Leverage Theory, and Downstream Competition (Fall 2007). American Law and Economics Review, Vol. 9, Issue 2, pp. 370-383, 2007. Available at SSRN: https://ssrn.com/abstract=1145991 or http://dx.doi.org/10.1093/aler/ahm009

Abraham L. Wickelgren

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

University of Texas at Austin - Center for Law, Business, and Economics

Austin, TX 78712
United States

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