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Upgrades, Switching Costs and the Leverage Theory of Tying

Authors


  • Corresponding author: Michael Waldman, Johnson Graduate School of Management, Cornell University, Sage Hall, Ithaca, NY 14853, USA. Email: mw46@cornell.edu.

  • We thank seminar and conference participants at Cornell University, the University of Melbourne, the Joint Duke/Northwestern/Texas IO Theory Conference, the UBC Summer IO Conference, the International IO Conference, two anonymous referees, and the editor, David Myatt, for helpful comments. We also thank Justin Johnson for discussions helpful for the initial formulation of the ideas in the article.

Abstract

This article investigates the role of product upgrades and consumer switching costs in the tying of complementary products. Previous analyses have found that a monopolist of one product will not increase its profits and reduce social welfare by tying and leveraging its monopoly position into a complementary market if the initial monopolised product is essential, where essential means that all uses of the complementary good require the initial monopolised product. We show that this is not true in settings characterised by product upgrades and consumer switching costs. We also discuss various extensions including the role of the reversibility of tying.

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