How the source of the entrant's advantage limits entry‐deterring tying

Abstract

AbstractI revisit a simple model of entry‐deterring tying—example 1 from Whinston's (1990) seminal paper—but allow the potential entrant to have either a cost advantage or a willingness‐to‐pay (WTP) advantage relative to the incumbent. I show that, compared to the usual case in which the potential entrant is cost‐advantaged, tying is less effective against an entrant with a WTP advantage because an entrant with a large WTP advantage may be able to induce the buyer to buy both the tied bundle and the entrant's product. I also show that tying but failing to deter entry can be less costly when facing an entrant with a WTP advantage than when facing an entrant with a cost advantage. For a firm facing uncertainty about, for example, the entrant's entry costs, this makes tying a more attractive entry deterrence strategy against a WTP‐advantaged entrant. These results shed light on the important policy question of which markets are most likely to be susceptible to entry‐deterring tying.