Tying Meets the New Institutional Economics: Farewell to the Chimera of Forcing

Abstract:     
Antitrust law's traditional hostility to tying contracts was premised upon a belief that all such agreements were the result of coercive forcing, i.e., the use of market power to compel acceptance of the agreement. Current law, couched as a per se rule against such agreements, is not in fact as hostile as the traditional approach. Nonetheless, the modern per se rule still rests upon the irrebuttable presumption that, if a seller possesses meaningful market power, any tying contract obtained by the seller results from an exercise of that power to coerce the buyer's acceptance of the agreement. This article demonstrates that the economic premises underlying both the traditional and modern approaches to tying doctrine are flawed. In particular, application of the New Institutional Economics (NIE), with its origins in Ronald Coase's theory of the firm, establishes that tying contracts can be methods of reallocating background property rights so as to reduce transaction costs and thus avoid market failures that would result if the purchaser chose which products to employ in conjunction with the tying product. NIE also establishes that such contracts are the result of a contracting process that is unrelated to forcing, even if the seller possesses market power. To be precise, this article argues that sellers obtain agreement to ties that reduce transaction costs by offering purchasers two options: sale of the tying product free and clear, at a relatively high price, or sale of the tying product with an accompanying restraint, at a relatively low price. Because such a price differential is cost-justified, it does not reflect an exercise of market power, even if the buyer is left with no meaningful choice but to accept the tying agreement. As a result, courts must abandon the per se doctrine as resting upon a demonstrably false economic premise.

Unlike the Chicago School critique of tying doctrine, the approach offered here takes as a given traditional normative premises about the goals of antitrust law, in particular, the assumption that coercion in the form of forcing should be condemned in its own right. Despite this assumption, N.I.E.'s analysis of tying contracts still counsels a retreat from the per se rule, which rests upon the illogical presumption that all tying contracts drafted by firms with market power constitute forcing.

Keywords: Tying, Transaction Costs, Market Failure, Antitrust, New Institutional Economics

JEL Classifications: D12, D23, K21, L14, L22, L42

Accepted Paper Series