Bundled Discounts, Leverage Theory, and Downstream Competition

John Simpson, FTC
Abraham L. Wickelgren, Northwestern University

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 if it receives more favorable pricing on the tying good and its competitors do not, and suffers if its competitors receive more favorable pricing on the tying good and it 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.