Tying Arrangements as Insurance
7 Pages Posted: 15 Nov 2012
Date Written: 1975
Economists have typically argued that the contractual arrangement known as the tie-in sale acts as a constraint on consumer behavior and therefore reduces welfare. This conclusion is based upon the standard static-certainty theory of consumer behavior. We argue that the implications derived from this theory might not be valid when imperfect information, risk, and transaction costs are significant. Describing the evolution of the computer industry, we argue that the tie-in sale of hardware and software was mutually advantageous to both the manufacturers and the consumers, since it was the most economical way of providing insurance for the performance of computer services. The policy implication from our analysis is that the tie-in sales should not be a per se violation of antitrust laws.
Keywords: Steve Hanke, Meltzer, Tying Arrangements Insurance
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