Tying Law and Policy: A Decision Theoretic Approach

Abstract:     
This paper offers a decision theoretic framework for analyzing tying law, and presents a critical assessment of post-Chicago tying theory. The decision theoretic framework takes into account the likelihood of judicial error in the application of rules and the costs of such error. We use the decision theoretic framework to assess the proper legal rules regarding tying and technological integration. Three general themes run throughout much of our analysis. First, the per se rule against tying simply has no economic foundation. Second, while the post-Chicago literature established the theoretical possibility of anticompetitive tying, one must know the frequency of anticompetitive tying to formulate a rational legal rule. Because beneficial tying is so pervasive, rules against tying could be harmful even with a small rate of "false convictions." Third, the most plausible post-Chicago theory of anticompetitive tying is based on the assumption that the tying and tied goods are complementary and that they are both susceptible to market power. However, the long-established principle that integrated complementary monopoly results in lower prices than independent complementary monopolies suggests that a policy biased toward independent complementary monopolies has the predictable consequence of reducing consumer welfare. There are two implications for the law: for contractual tying cases, the rule of reason with a heavy burden of proof for plaintiffs should be applied; and for technological integration cases, the deferential legal standard in most circuits is preferable to the D.C. Circuit's rule of reason standard for software.

JEL Classification: K21, K42, L41, L43, O31

Accepted Paper Series