Tying, investment, and the dynamic leverage theory

Jay Pil Choi, Christodoulos Stefanadis

Research output: Contribution to journalArticle

131 Citations (Scopus)

Abstract

The idea that an incumbent supplier may tie two complementary products to fend off potential entrants is popular among practitioners vet is not fully understood in formal economic theory. This article makes sense of the argument by formally deriving a dynamic version of the old leverage doctrine. We show that when an incumbent monopolist faces the threat of entry in all complementary components, tying may make the prospects of successful entry less certain, discouraging rivals from investing and innovating. Tie-in sales may reduce consumer and total economic welfare.

Original languageEnglish
Pages (from-to)52-71
Number of pages20
JournalRAND Journal of Economics
Volume32
Issue number1
DOIs
Publication statusPublished - 2001 Jan 1

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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