Tying, Foreclosure, and Exclusion

Abstract

Tied sales have a long history of scrutiny under the antitrust laws of the United States. The primary basis for the condemnation of this practice has been the court's belief in what has come to be known as the "leverage theory" of tying: that is, that tying provides a mechanism whereby a firm with monopoly power in one market can use the leverage provided by this power to foreclose sales in, and thereby monopolize, a second market. In recent years, however, the leverage theory has come under heavy attack. In this paper, I reconsider the leverage hypothesis. I argue that, in an important sense, the models used by the critics of the leverage theory which all assume that the tied good market has a competitive, constant returns-to-scale structure- are incapable of addressing the central concern of the leverage theory, that tying can be profitably used to change the market structure of the tied good market. I then demonstrate that when the tied good market has an oligopolistic structure, tying can indeed serve as a mechanism for leveraging market power through the foreclosure of tied market rivals sales. The mechanism through which this foreclosure occurs, its profitability for the monopolist, and its welfare implications are discussed in detail.