Tying with Network Effects

Abstract

We develop a leverage theory of tying in markets with network e¤ects. When a monopolist in one market cannot fully extract the whole surplus from con- sumers, tying can be a mechanism through which the unexploited consumer surpluses are used as a demand-side leverage to create a strategic "quasi installed-base" advantage in another market characterized by network e¤ects. Our mechanism does not require the commitment assumption with technical tying. Tying can lead to the exclusion of more effcient rival forms in the tied market, but expand the tying good market if the latter market is not fully covered with independent pricing. Welfare implications are also discussed.