Tying in Evolving Industries, When Future Entry Cannot Be Deterred

35 Pages Posted: 7 Oct 2019

See all articles by Chiara Fumagalli

Chiara Fumagalli

Università Bocconi

Massimo Motta

Universitat Pompeu Fabra

Multiple version iconThere are 2 versions of this paper

Date Written: September 2019

Abstract

We show that the incentive to engage in exclusionary tying (of two complementary products) may arise even when the incumbent's dominant position in the primary market cannot be protected. By engaging in tying, an incumbent firm sacrifices current profits but can exclude a more efficient rival from a complementary market by depriving it of the critical scale it needs to be successful. In turn, exclusion in the complementary market allows the incumbent to be in a favorable position when a more efficient rival will enter the primary market, and to appropriate some of the rival's efficiency rents. The paper also shows that tying is a more profitable exclusionary strategy than pure bundling, and that exclusion is the less likely the higher the proportion of consumers who multi-home.

Keywords: Inefficient foreclosure, network externalities, Scale Economies, Tying

JEL Classification: K21, L41

Suggested Citation

Fumagalli, Chiara and Motta, Massimo, Tying in Evolving Industries, When Future Entry Cannot Be Deterred (September 2019). CEPR Discussion Paper No. DP14031. Available at SSRN: https://ssrn.com/abstract=3464576

Chiara Fumagalli (Contact Author)

Università Bocconi ( email )

Massimo Motta

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

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