Raising Rivals' Costs in Complementary Goods Markets: LECs Entering into Long Distance and Microsoft Bundling Internet Explorer

Abstract

Frequently, a monopolist or dominant firm in an input market also sells a complementary product for which the input is indispensable. It is often the case that the monopolist faces significant competition in the complementary goods markets. For example, a LEC is a monopolist in the provision of terminating and originating access for long distance service. If it were presently allowed to offer long distance service, it would be competing with a number of other carriers. In a second important example, Microsoft is dominant in the operating systems market for personal computers and it also sells various applications that require the use of the operating system. In many of the applications markets, such as the market for internet browsers, Microsoft faces significant competition. - This paper shows that the monopolist has incentives (i) to raise the costs of its rivals in the complementary markets; and (ii) to degrade the quality of the monopolized good when this good is combined with complementary goods of its competitors. Such behavior is expected by LECs once they enter the long distance market. Microsoft may also have exhibited such behavior by (i) bundling Internet Explorer with Windows95; and (ii) by seamlessly integrating Internet Explorer 4.0 with Windows Explorer in Windows95 and Windows98.