Should Antitrust Condemn Tying Arrangements that Increase Price Without Restraining Competition?

Abstract

Early in the development of the antitrust laws, the U.S. Supreme Court declared that conditioning the sale of one product on the customer's agreement to purchase another ("tying" or "tie-in sales") was inherently anticompetitive and lacked any redeeming virtue. During the Chicago School's ascendancy, article after article appeared challenging that notion and explaining how tying could benefit consumers. Einer Elhauge's article, "Tying, Bundled Discounts, and the Death of the Single Monopoly Profit Theory," 123 Harv. L. Rev. 397 (2009), finally turns the tables, purporting to show that tying, in many of its forms, is bad for consumers after all. In the process, Elhauge takes on not just the old Chicago School, but also the current mainstream commentators who oppose existing law's tough approach to tying.

Valuable as all this is, Elhauge makes one less than convincing claim: that antitrust law should condemn tying by firms with market power even when the practice does not restrain competition in the tied product market. He systematically seeks to show that tying enables a firm with market power to charge higher prices than it could if it simply charged the profit-maximizing price on the tying product alone. But he shortchanges the most compelling counter argument: namely, that granting firms with market power broad leeway to exploit that power actually benefits consumers over time so long as competing firms are not restrained. Despite the short-run harm from temporarily higher prices, the opportunity to charge them encourages rival firms to invest in innovative activities that are essential to a vibrant economy.

This Response first articulates the case for permitting firms that do not restrain competition to exploit market power through tying. The Response criticizes Elhauge's counter-points, and concludes that irrespective of who wins the economic debate, Elhauge's approach necessarily conflicts at a deep level with the theory of competition policy that underlies antitrust law. As a result, one who accepts his argument with respect to tying would be compelled to re-examine antitrust doctrine all the way down to its core.

Keywords: antitrust, market power, tying, competition, innovation

JEL Classification: K10, K21