DP11484 A Leverage Theory of Tying in Two-Sided Markets

Author(s): Jay-Pil Choi, Doh-Shin Jeon
Publication Date: September 2016
Keyword(s): Leverage of monopoly power, Non-negative pricing constraint, Two-sided markets, Tying, Zero pricing
JEL(s): D4, L1, L5
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11484

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.