Tying Arrangements

Abstract

This paper provides an overview of the law and the antitrust economics of tying. After describing the many varieties of tying arrangements we examine specific legal tying doctrines and gauge their effectiveness in identifying anticompetitive ties. We generally assume that the appropriate antitrust goal is consumer welfare; however, all situations in which consumer welfare is increased by a tie also result in an increase in general welfare. We look at the use of ties as quality control devices and as ways of obtaining both production and distribution efficiencies.

Market power in either the tying or tied product is a necessary but not sufficient condition for competitive harm. Further the co-called “leverage” theory of tying has been appropriately denigrated, except for a few exceptional circumstances. However, the term “foreclosure” still serves to describe some anticompetitive ties. The Ninth Circuit recently dismissed a tying claim for failure to allege foreclosure, thus implicitly rejecting leverage claims. We also expand upon the rationale that ties can be used as price discrimination devices and analyze the effects of such ties on consumer welfare.

When both the tying and tied markets are noncompetitive ties are commonly used to prevent double marginalization. Such ties produce lower prices, higher output, and increased consumer welfare. If the tying and tied products are perfect complements or nearly so, then welfare increases are highly likely. If the two products are imperfect complements then consumer welfare losses may occur because some buyers are forced to take an unwanted product or do without. In this latter set of cases a bundled discount tends to produce greater welfare because those who wish only one product can continue to purchase it, although at a higher price. Thus bundled discounts serve to discriminate between classes of customers where gains from the elimination of double marginalization are possible and those in which they are not. Whether a firm increases or reduces the price of the primary product upon bundling depends on the elasticity of demand for separate sales, and a price increase does not establish that the bundle is anticompetitive.

Finally, we examine optimal damages for tying, looking in particular at the historical test which based damages on tied product overcharges; and the current dominant test which bases damages on the net overcharge of the sum of the tying and tied product prices. We find shortcomings in both methodologies.

Keywords: tying, ties, antitrust, consumer welfare, price discrimination, double marginalization