Anticompetitive Exclusion in Related Markets

Paolo Ramezzana, Compass Lexecon discusses Anticompetitive Exclusion in Related Markets

ABSTRACT: This paper shows how monopolization of a given market through exclusive contracts can affect the profitability of monopolization of another market in a model with two incumbent firms, each producing a distinct substitute or complementary good and each facing a distinct potential entrant. Externalities between incumbents operate through a “scale effect” and a “profit extraction effect”. With linear demand, when both potential entrants have intermediate levels of entry costs there exist multiple equilibria. In particular, when the goods are strong complements there exist an equilibrium with monopolization in both markets and an equilibrium with entry in both markets. When the goods are subsitutes or weak complements there exist two asymmetric equilibria, each with a different incumbent monopolizing its market while the other does not. The equilibrium is instead unique when at least one of the two potential entrants has very high or very low entry costs. I discuss implications for antitrust enforcement in markets for complementary inputs and for national antitrust policy-making in the presence of international trade in substitute goods.