Abstract
For almost a century, antitrust commentators have struggled to
explain why firms engage in leveraging behavior and whether leveraging
damages competition. The literature has focused on whether a firm
with a monopoly in one market can use leveraging to gain additional
monopoly profit from a second market. This article introduces
the theory of defensive leveraging. According to the theory, leverage
behavior should not be analyzed solely as an attempt to reap additional
monopoly profit from a second market. Rather, it may be an attempt
to prevent erosion of the primary monopoly. The article analyzes
the life cycle of a monopoly and explains how defensive leveraging
helps a monopolist extend the life of its primary monopoly by
preventing splintering and next generation substitution. The article
then applies defensive leveraging theory to three market examples:
Microsoft's behavior in the market for Internet browsers, competition
between physician and nonphysician health care providers, and
Eli Lilly's behavior in the market for cephalosporins.
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