Battles over Product Boundaries Battles over Product Boundaries and the Double Mark-up Problem

Previous studies on “tying” are based on the premise that there are clear boundaries between tied products. However, in the computing industry there are constant battles over boundaries between complementary products. A dominant firm in one layer of a multilayered system usually attempts to extend into other layers by including some of the latter’s functions into its own products. For instance, Microsoft’s Windows expanded its boundary to include several applications such as Internet Explorer and Media Player, which were supplied by its “complementors.” When one of two firms expands its product boundary to make its product less dependent on its complement, it may help to solve the well-known "double mark-up" problem that plagues industries with vertically related monopolies, even though one product does not completely replace the other product. Thus, the expansion of the firm’s product boundary increases not only its own profits, but also the profits of its complementor and social welfare. JEL Code: D4, D8, M3, L13