Jeon, Doh-Shin, Choi, Jay Pil and Whinston, Michael Dennis (2024) Tying with Network Effects. TSE Working Paper, n. 1524, Toulouse

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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.