The Welfare Effects of Metering Ties

33 JOURNAL OF LAW, ECONOMICS & ORGANIZATION (2017 Forthcoming)

Harvard Public Law Working Paper No. 16-20

54 Pages Posted: 9 Apr 2015 Last revised: 18 May 2017

See all articles by Einer Elhauge

Einer Elhauge

Harvard Law School

Barry J. Nalebuff

Yale University - Yale School of Management; Yale University - Cowles Foundation

Date Written: June 30, 2016

Abstract

Critics of current tying doctrine argue that metering ties can increase consumer welfare and total welfare without increasing output and that they generally increase both welfare measures. Contrary to those claims, we prove that metering ties always lower consumer welfare and total welfare unless they increase capital good output. We further show that under market conditions we argue are realistic (which include a lognormal distribution of usage rates that are independently distributed from per-usage valuations), metering ties always harm consumer welfare, even when output increases. Under those market conditions, we show that whether metering ties raise or lower total welfare depends on the dispersion of desired usage, the cost structure, and the dissipation of profits caused by metering. For realistic cost values, metering ties will reduce total welfare if the dispersion in desired usage of the metered good is below 0.62. (For comparison, 0.74 is the dispersion of income in the U.S.) If 5% of metering profits are dissipated, metering will reduce total welfare for all cost levels unless the dispersion in desired usage exceeds 150% of the dispersion of income in the U.S.

Keywords: antitrust, bundling, consumer welfare, metering, price discrimination, quasi per se rule, ties, tying, requirements ties

JEL Classification: C72, K21, L12, L40, L41, L42

Suggested Citation

Elhauge, Einer R. and Nalebuff, Barry, The Welfare Effects of Metering Ties (June 30, 2016). 33 JOURNAL OF LAW, ECONOMICS & ORGANIZATION (2017 Forthcoming); Harvard Public Law Working Paper No. 16-20. Available at SSRN: https://ssrn.com/abstract=2591577 or http://dx.doi.org/10.2139/ssrn.2591577

Einer R. Elhauge (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

Barry Nalebuff

Yale University - Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5968 (Phone)
203-432-6974 (Fax)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-5968 (Phone)

HOME PAGE: http://barrynalebuff.com

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