Working paper

A Leverage Theory of Tying in Two-Sided Markets

Jay Pil Choi, and Doh-Shin Jeon

Abstract

Partly motivated by the recent antitrust investigations concerning Google, we develop a leverage theory of tying in two-sided markets. We analyze incentives for a monopolist to tie its monopolized product with another product in a two-sided market. Tying provides a mechanism to circumvent the non-negative price constraint in the tied product market without inviting an aggressive response as the rival firm faces the non-negative price constraint. We identify conditions under which tying in two-sided markets is profitable and explore its welfare implications. Our mechanism can be more widely applied to any markets in which sales to consumers in one market can generate additional revenues that cannot be competed away due to non-negative price constraints.

Keywords

Tying; Leverage of monopoly power; Two-sided markets; Zero pricing; Non-negative pricing constraint;

JEL codes

  • D4: Market Structure and Pricing
  • L1: Market Structure, Firm Strategy, and Market Performance
  • L5: Regulation and Industrial Policy

Reference

Jay Pil Choi, and Doh-Shin Jeon, A Leverage Theory of Tying in Two-Sided Markets, TSE Working Paper, n. 16-689, September 2016, revised March 2018.

See also

Published in

TSE Working Paper, n. 16-689, September 2016, revised March 2018