Why Do Firms Bundle and Tie? Evidence from Competitive Markets and Implications for Tying Law

Abstract

Tying the sale of products that could be sold separately is common in competitive markets - from left and right shoes, to the sports and living sections of daily newspapers, to cars and radios. This paper presents a cost-based theory for why tying occurs in competitive markets and uses this theory to examine bundling and tying in pain relievers and cold medicines, foreign electrical plug adapters, and mid-sized automobile sedans. It shows that product-specific scale economies are needed to understand tying but that these scale economies might be hard to detect even when they are present. We draw two principle conclusions for tying doctrine. First, per se condemnation in its various manifestations is wrong as a matter of economics. Neither the Jefferson-Parish test in the United States nor the Hilti/Tetra-Pak approach in the EU is capable of screening anti-competitive from pro-competitive tying. Second, if it is hard to establish efficiencies when practices could not arise for anticompetitive reasons, it might also be hard to establish the efficiencies required by the rule of reason or per se approaches. Both approaches are therefore likely to result in the frequent condemnation of efficient tying - that is a high rate of false convictions.

Keywords: economics of tying, tying and efficiency, antitrust and tying, per se tying, tying in competitive markets