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American Law and Economics Review Advance Access published online on October 12, 2007
American Law and Economics Review, doi:10.1093/aler/ahm009
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Copyright © The Author 2007. Published by Oxford University Press on behalf of the American Law and Economics Association.

Bundled Discounts, Leverage Theory, and Downstream Competition

John Simpson and Abraham L. Wickelgren

Federal Trade Commission
Northwestern University

Send correspondence to: Abraham L. Wickelgren, Northwestern University School of Law, 357 E. Chicago Ave., Chicago, IL 60614, USA; E-mail: a-wickelgren{at}law.northwestern.edu.


  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.

This article reflects the opinion of the authors and is not intended to represent the position of the Federal Trade Commission or the views of any individual Commissioner. Patrick DeGraba, Daniel O'Brien, and one anonymous referee provided helpful comments.


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