The Incentives of a Monopolist to Degrade Interoperability: Theory and Evidence from PCs and Servers

Joint with: Christos Genakos and Kai-Uwe Kuhn

We consider the incentives of a monopolist to leverage into a complementary market by degrading interoperability. In a framework incorporating heterogeneous consumers’ demand, we derive explicit conditions for the incentives to hold that are amenable to empirical testing. Essentially, in the absence of perfect price discrimination, leveraging becomes a method to extract more rents from the monopoly market. We test these predictions in the context of Microsoft’s alleged

strategic incentives to leverage market power from personal computer to server operating systems in the late 1990s. We find robust empirical evidence that these incentives exist and that they have grown stronger over time. Moreover, in a dynamic extension of our model, we show why a monopolist in this market has further long run incentives to limit interoperability.

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