Exclusionary pricing in markets with interdependent demands

•This paper provides a theoretical rationale for exclusion in markets with interdependent demands.•The proposed model captures the main features of a recent antitrust case in the UK-the Napp case.•It is shown that when exclusion occurs, it is always socially optimal.•In addition, the model always predicts the existence of inefficient entry.•The paper does not find support for the idea that Napp did breach competition laws.

In this paper I use a simple model to study the competitive effects of exclusionary pricing involving two markets related by a positive demand externality. It is shown that below-cost pricing on one of these markets can allow an incumbent firm to exclude (from both markets) a more efficient rival which does not have a customer base yet. However, when exclusion occurs, it is always socially optimal. In addition, under some circumstances, there is inefficient entry: the entrant wins both markets while the social optimum would require the incumbent to win them.