Appropriate Liability Rules for Tying and Bundled Discounting

Abstract

Professor Einer Elhauge’s highly acclaimed article, Tying, Bundled Discounts, and the Death of the Single Monopoly Profit Theory, 123 Harv. L. Rev. 397 (Dec. 2009), contests two propositions on which efficiency-minded antitrust scholars have largely agreed: (1) that there should be no tying liability absent substantial tied market foreclosure (a position contrary to the legal status quo), and (2) that courts should recognize a safe harbor for any bundled discount that results in above-cost pricing that could be matched by an equally efficient, single-product rival. Elhauge maintains that tie-ins that do not cause substantial tied market foreclosure may nonetheless occasion adverse “power” effects that the U.S. Supreme Court has properly deemed to be anticompetitive. Those power effects may also result, Elhauge argues, from bundled discounts (even “above-cost” bundled discounts) that involve artificial inflation of the unbundled “linking” product price. These conclusions lead Elhauge to defend prevailing tying doctrine and to advocate a bundled discount rule that eschews price-cost comparisons and instead focuses on whether the discounter has raised the unbundled price of its linking product above but-for levels.

This Article asserts a comprehensive response to Elhauge’s provocative arguments. With respect to tying, the Article shows that governing Supreme Court precedent does not deem the non-foreclosure “power” effects of the practice to be anticompetitive and that those effects are unlikely to reduce social welfare in the long run, especially after accounting for dynamic efficiencies. With respect to bundled discounting, the Article shows that Elhauge’s proposed liability rule is both inapposite to consumer harm and inadministrable and that both “linked” market foreclosure and a form of below-cost pricing are necessary for anticompetitive harm and should therefore be prerequisites to antitrust liability.

Keywords: tying, bundled discounts, Elhauge, antitrust, Sherman Act, monopolization, predatory pricing, price discrimination

JEL Classification: D40, D42, K21, L11, L12, L40, L41, L42