Research Articles

A Leverage Theory of Tying in Two-Sided Markets

A Leverage Theory of Tying in Two-Sided Markets

Abstract

Motivated by recent antitrust cases in markets with zero-pricing, we develop a leverage theory of tying in two-sided markets. In the presence of the non-negative price constraint, tying provides a mechanism to circumvent the constraint in the tied market without inviting aggressive responses by the rival firm. We identify conditions under which tying in two-sided markets is profitable and explore its welfare implications. In addition, we show that our model can be applied more widely to any markets in which sales to consumers in one market can generate additional revenues that cannot be competed away due to non-negative price constraints.

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