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How the source of the entrant's advantage limits entry-deterring tying

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  • Kenneth S. Corts

Abstract

I revisit a simple model of entry-deterring tyingexample 1 from Whinston's (1990) seminal paperbut allow the potential entrant to have either a cost advantage or a willingness-to-pay (WTP) advantage relative to the incumbent. I show that, compared to the usual case in which the potential entrant is cost-advantaged, tying is less effective against an entrant with a WTP advantage because an entrant with a large WTP advantage may be able to induce the buyer to buy both the tied bundle and the entrant's product. I also show that tying but failing to deter entry can be less costly when facing an entrant with a WTP advantage than when facing an entrant with a cost advantage. For a firm facing uncertainty about, for example, the entrant's entry costs, this makes tying a more attractive entry deterrence strategy against a WTP-advantaged entrant. These results shed light on the important policy question of which markets are most likely to be susceptible to entry-deterring tying.

Suggested Citation

  • Kenneth S. Corts, 2018. "How the source of the entrant's advantage limits entry-deterring tying," Canadian Journal of Economics, Canadian Economics Association, vol. 51(2), pages 510-527, May.
    • Handle: RePEc:cje:issued:v:51:y:2018:i:2:p:510-527
    DOI: 10.1111/caje.12329
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    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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