DP8502 Leveraging Monopoly Power by Degrading Interoperability: Theory and evidence from computer markets

Author(s): Christos D. Genakos, Kai-Uwe Kühn, John Van Reenen
Publication Date: August 2011
Keyword(s): anti-trust, demand estimation, foreclosure, interoperability
JEL(s): D43, L1, L4, O3
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8502

When will a monopolist have incentives to foreclose a complementary market by degrading compatibility/interoperability of his products with those of rivals? We develop a framework where leveraging extracts more rents from the monopoly market by 'restoring' second degree price discrimination. In a random coefficient model with complements we derive a policy test for when incentives to reduce rival quality will hold. Our application is to Microsoft?s strategic incentives to leverage market power from personal computer to server operating systems. We estimate a structural random coefficients demand system which allows for complements (PCs and servers). Our estimates suggest that there were incentives to reduce interoperability which were particularly strong at the turn of the 21st Century.