7 Pages Posted: 10 Jul 2011 Last revised: 22 Oct 2015
Date Written: 1998
Tying, a frequent phenomenon in the marketplace, occurs when a firm decides to link the sale of one product or service to another product or service. Since tying arrangements are often illegal and have resulted in much litigation, a large number of well-documented examples of the practice exist. For example, in the 1930s IBM required customers leasing its tabulating machines to also purchase from IBM all the punch cards used with the machines. A more recent case occurred in the 1980s when Kodak was charged with requiring customers of its high speed photocopiers to also purchase from Kodak their repair and maintenance service, with Kodak enforcing this tie by refusing to make the replacement parts for its copiers available to independent service firms.
The particular good the sale of which is conditioned on the purchase of another good (the tabulating machine in the IBM case or the replacement parts in the Kodak case) is referred to as the tying good; the additional good which consumers are required to purchase (the punch cards in the IBM case or the repair service in the Kodak case) is referred to as the tied good. The firm is claimed to use its market power in the tying good to force consumers to also purchase the tied good.
There are numerous economic reasons why a firm may use tying. Tying may be used to assure quality, to increase efficiency, to avoid price regulations and, most commonly, to price discriminate among customers. Each of these economic motivations for tying is discussed below and illustrated with examples.
Note: This paper was originally published in the New Palgrave Dictionary of Economics and the Law without an abstract.
JEL Classification: L42, K21
Suggested Citation: Suggested Citation