Bundled Discounts, Leverage Theory, and Downstream Competition

Under plausible circumstances, a monopolist in one market canuse its control of prices in that market to force competingdownstream buyers to sign tying contracts that will lever itsmonopoly into another market. Specifically, the monopolist ofthe tying good can place each downstream buyer in a prisoner'sdilemma by offering them more favorable pricing on the tyinggood if they sign a requirements-tying contract covering thetied good. Since a buyer benefits on receiving more favorablepricing on the tying good and the competitors do not, and suffersif the competitors receive more favorable pricing on the tyinggood and the buyer does not, buyers will sign the tying contracteven when they would earn higher profits if they all refusedto sign. This enables a monopolist in one market to inefficientlyexclude an entrant in another market.