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  5. Tying with Network Effects

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Tying with Network Effects

  • Jay Pil Choi
  • Doh-Shin Jeon
  • Michael D. Whinston
American Economic Review (Forthcoming)

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.

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