Discussion Paper Details

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Title: Tying in evolving industries, when future entry cannot be deterred

Author(s): Chiara Fumagalli and Massimo Motta

Publication Date: September 2019

Keyword(s): Inefficient foreclosure, network externalities, Scale Economies and Tying

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Fumagalli, C and Motta, M. 2019. 'Tying in evolving industries, when future entry cannot be deterred'. London, Centre for Economic Policy Research.