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Bundled Discounts, Leverage Theory, and Downstream Competition

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  • Abraham L. Wickelgren

Abstract

Under plausible circumstances, a monopolist in one market can use its control of prices in that market to force competing downstream buyers to sign tying contracts that will lever its monopoly into another market. Specifically, the monopolist of the tying good can place each downstream buyer in a prisoner's dilemma by offering them more favorable pricing on the tying good if they sign a requirements-tying contract covering the tied good. Since a buyer benefits on receiving more favorable pricing on the tying good and the competitors do not, and suffers if the competitors receive more favorable pricing on the tying good and the buyer does not, buyers will sign the tying contract even when they would earn higher profits if they all refused to sign. This enables a monopolist in one market to inefficiently exclude an entrant in another market. Copyright 2007, Oxford University Press.

Suggested Citation

  • Abraham L. Wickelgren, 2007. "Bundled Discounts, Leverage Theory, and Downstream Competition," American Law and Economics Review, American Law and Economics Association, vol. 9(2), pages 370-383.
    • Handle: RePEc:oup:amlawe:v:9:y:2007:i:2:p:370-383
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    File URL: http://hdl.handle.net/10.1093/aler/ahm009
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    Cited by:

    1. Sreya Kolay, 2018. "Tie-in contracts with downstream competition," Quantitative Marketing and Economics (QME), Springer, vol. 16(1), pages 43-77, March.
    2. Cesaltina Pacheco Pires & Margarida Catalão‐Lopes, 2020. "Does asymmetric information always help entry deterrence? Can it increase welfare?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(3), pages 686-705, July.
    3. Nicholas Economides, 2014. "Bundling and Tying," Working Papers 14-22, NET Institute.
    4. DeGraba, Patrick, 2013. "Naked exclusion by a dominant input supplier: Exclusive contracting and loyalty discounts," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 516-526.

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