Tying Arrangements and Antitrust Harm
Erik N. Hovenkamp
Northwestern University Department of Economics
Herbert J. Hovenkamp
University of Iowa - College of Law
Febuary 4, 2011
Arizona Law Review, Vol. 52, p. 925, 2010
U Iowa Legal Studies Research Paper No. 10-18
A tying arrangement is a seller’s requirement that a customer may purchase its “tying” product only by taking its “tied” product. In a variable proportion tie the purchaser can vary the amount of the tied product. For example, a customer might purchase a single printer, but either a contract or technological design requires the purchase of varying numbers of printer cartridges from the same manufacturer.
Such arrangements are widely considered to be price discrimination devices, but their economic effects have been controversial. Tying has been attacked on the theory that price discrimination of this sort reduces consumer welfare. We show that this argument is based on a misunderstanding of the kind of price discrimination that is involved in variable proportion ties. The great majority of them almost certainly produce both welfare gains and net consumer benefits.
We also consider and reject the argument that tying produces greater welfare losses when viewed from an ex ante rather than an ex post perspective. That argument rests on a flawed premise about the sources of the increased returns to innovations whose distribution requires tying. Further, it ignores the important role of fixed costs in producing innovation incentives. We also show that tying in concentrated markets produces significant benefits from the elimination of double marginalization, which occurs when firms in complementary markets have market power and the two are unable to coordinate their output. In other cases ties effect two-part tariffs, which can also address double marginalization problems. Then we extend our analysis to bundled discounts, focusing on the possibility of increased harm that can occur if the monopolist increases the standalone price of one good when inaugurating the bundled discount.
Antitrust’s per se rule is reserved for practices that are so likely to cause antitrust harm and have so little to defend them that detailed case-by-case assessment is thought to be unnecessary. They can be condemned categorically simply upon a showing that a few basic conditions are satisfied and that they belong in a particular class of restraints. No kind of unilaterally imposed tying arrangement, even by a monopolist, falls into that category. Rather, the case for antitrust harm from tying is ambiguous at best and requires detailed scrutiny into market power, rationales for tying, and anticompetitive effects - all the subject of antitrust’s traditional rule of reason. Finally, we recommend that courts in antitrust cases forget about price discrimination or leveraging as independent anticompetitive concerns and focus on foreclosure, or antitcompetitive exclusion.
Number of Pages in PDF File: 52
Keywords: antitrust, tying arrangement, tie, welfare, competition, price discrimination, consumers, bundled discounts
JEL Classification: A1, K0, K2, K21, L1, L2, L21, L22, L23 L4Accepted Paper Series
Date posted: August 3, 2009 ; Last revised: February 7, 2011
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