A Welfare Evaluation of Tying Strategies

Abstract

We compare monopoly profit, consumer surplus, and total welfare associated with three commonly used tying strategies: no tying, pure tying, and mixed tying. Whereas the previous literature focused mainly on profit comparisons, this paper evaluates the relationship between component production costs and total welfare. We identify several market failures where the seller does not adopt the welfare-maximizing tying strategy. Finally, we explore how consumer exclusion rates (uncaptured market) are affected by tying strategy and some implications for unbundling regulation.