Leveraging Dominance with Credible Bundling

Doh-Shin Jeon, Sjaak Hurkens and Domenico Menicucci

No 11304, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We contribute to the leverage theory of tying by studying bundling of a dominant firm instead of a monopolist. We show that, when one firm has symmetric dominance across all markets, bundling has a positive demand size effect on the dominant firm but affects both firms similarly through the demand elasticity effect. The demand size affect is hump-shaped in dominance level whereas the demand elasticity affect is increasing and negative (positive) for low (high) dominance levels. This makes bundling credible for sufficiently strong dominance. In the case of asymmetric dominance levels, we identify three different circumstances in which a firm can credibly leverage its dominance in some (tying) markets to foreclose a dominant rival in other (tied) markets. Our findings provide a justification for the use of contractual bundling for foreclosure.

Keywords: Bundling; Tying; Leverage; Dominance; Entry barrier (search for similar items in EconPapers)
JEL-codes: D43 L13 L41 (search for similar items in EconPapers)
Date: 2016-05
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta, nep-mkt and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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