Tying with network effects

Jay Pil Choi (), Doh-Shin Jeon and Michael Dennis Whinston ()
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Jay Pil Choi: Michigan State University [East Lansing] - Michigan State University System
Michael Dennis Whinston: MIT Sloan - Sloan School of Management - MIT - Massachusetts Institute of Technology

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Abstract: We develop a leverage theory of tying in markets with network effects. When a monopolist in one market cannot perfectly extract surplus from consumers, tying can be a mechanism through which unexploited consumer surplus is used as a demand-side leverage to create a "quasi-installed base" advantage in another market characterized by network effects. Our mechanism does not require any precommitment to tying; rather, tying emerges as a best response that lowers the quality of tied-market rivals. While tying can lead to exclusion of tied-market rivals, it can also expand use of the tying product, leading to ambiguous welfare effects.

Date: 2024-04-03
Note: View the original document on HAL open archive server: https://hal.science/hal-04960506v1
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Working Paper: Tying with Network Effects (2024)
Working Paper: Tying with Network Effects (2024)
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