Joint Production and Monopoly Extension through Tying

Brennan, Timothy J.; Kimmel, Sheldon
October 1986
Southern Economic Journal;Oct86, Vol. 53 Issue 2, p490
Academic Journal
The purpose of this paper, however, is to illuminate possible exceptions to this rule. Primarily, we explore a situation in which a firm is assumed to hold a monopoly over the distribution of a product that is jointly produced with a second product. A hypothetical example would be a monopoly distributor of beef, where beef is jointly produced with leather through the raising of cattle. We find that there are circumstances in which such a monopolist can increase profits by tying the purchase and distribution of the jointly produced products creating a second monopoly. These gains do not come from increased ability to price discriminate; the demand curves for the tied and tying product are assumed to be independent. In our hypothetical example, the monopoly beef distributor may be able to increase profits by conditioning his distribution of beef on the cattle producer's agreement to market all of his leather through him. In so doing, the beef distributor may create for itself a new monopoly in leather. It is in this sense that tying can be used to "extend monopoly through leverage." We have shown here that a tie-in by a monopolist in one market can create, through "leverage," a monopoly in a second market with increased profits. This theory differs from the conventional tie-in story, in that the tie is invoked against the suppliers to the monopolist, not against the consumers of the monopolist. For the tie to be effective, economies of scope and demand conditions must be such that the producers cannot sell the second good profitably unless they can sell the first good to the monopolist as well. The monopolist, however, need not have the power to reduce the returns to the suppliers of the input to be able to profit from this tying strategy.


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