Tying

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Tying is the practice of making the sale of one good (the tying good) to the de facto or de jure customer conditional on the purchase of a second distinctive good (the tied good). A classic example of de facto tying is the selling of razors at a loss and making the profit on the blades. Cell phones and printers sold at below cost, the profit to be made on the subsequent minutes or printer cartridges, are also common.

Some kinds of tying, especially by contract, have historically been regarded as anti-competitive as it is implied in this that one or more components of the package are sold individually by other businesses as their primary product, and thereby this bundling of goods would hurt their business. It is also implied that the company doing this bundling has a significantly large market share so that it would hurt the other companies who sell only single components.

Tying has been defended as maximizing overall welfare in a variety of circumstances. If the main product works better with the tied product than with others, the manufacturer may tie the products to avoid quality problems that could lead to product liability lawsuits or loss of reputation. Tying may also be a form of price discrimination: people who use more blades, for example, pay disproportionately more than those who just need a one-time shave, and this may improve overall welfare, benefitting most consumers as well as the manufacturer. Tying may also be used with or in place of intellectual property to help protect entry into a market, encouraging innovation.

Tying is often used when the supplier makes one product that is critical to many customers. By threatening to withhold that key product unless others are also purchased, it is said, the supplier can increase sales of less necessary products.

Horizontal tying is the practice of requiring customers to pay for an unrelated product or service together with the desired one. For example, all of one company's toothbrushes come with the company's ice skates.

Vertical tying is the practice of requiring customers to purchase related products or services from the same company. For example, a company's automobile only runs on its own proprietary gas and can only be serviced by its own dealers. In an effort to curb this, many jurisdictions require that warranties not be voided by outside servicing; for example see the Magnuson-Moss Warranty Act in the United States. More recently, video game consoles run only software licensed by the console manufacturer and use lockout chips to enforce this.

By some accounts, Microsoft ties together Microsoft Windows, Internet Explorer, and Outlook Express. Microsoft's view of it is that a web browser and a mail reader are simply part of an operating system (and are included with all other personal computer operating systems). Just as the definition of a car has changed to include things that used to be separate products, such as speedometers and radios, the definition of an operating system has changed to include those formerly separate products. However, the District of Columbia Circuit Court of Appeals rejected Microsoft's claim that Internet Explorer was simply one facet of its operating system. At the same time, the court held that the tie between Windows and Internet Explorer should be analyzed under the Rule of Reason. See United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001).

Tying may be the action of several companies, as well as the work of just one firm.

It was first made potentially illegal in the United States by the Sherman Antitrust Act (section 1) if the firm has "economic power" in the tying good, and a "non-trivial" amount of business is affected by the tying. See Northern Pacific Ry v. United States, 356 U.S. 1 (1958); International Salt Co. v. United States, 332 U.S. 392 (1947). For at least three decades, the Supreme Court defined "economic power" to include just about any departure from perfect competition, going so far as to hold that possession of a copyright or even the existence of a tie itself gave rise to a presumption of economic power. See Fornter Enterprises v. United States Steel, 394 U.S. 495 (1969); United States v. Loew's, Inc. 372 U.S. 38 (1962). More recently, the Supreme Court has held that a plaintiff must establish the sort of market power necessary to other antitrust violations in order to show the sort of "economic power" necessary to establish a per se tie. See Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1985).

Scholars from various schools of antitrust policy have been consistently critical of the per se rule against tying contracts. Some, particularly those in the "Chicago School," argue that such contracts are generally employed to effect otherwise lawful price discrimination. Chicagoans have also argued that a firm with power in the market for the "tying" product cannot enhance its profit by employing power over the tying product to gain influence in the market for the tied product. Thus, these scholars assumed that firms employed market power to "impose" tying contracts, but that such contracts were nonetheless harmless or even beneficial.

Other scholars argue that ties can be methods of overcoming market failures that unbridled rivalry might otherwise produce. For instance, some economists have argued that a franchisor may employ tying contracts to ensure that franchisees with little repeat business purchase inputs of sufficient quality. Absent such agreements, it is said, some franchisees will have an incentive to use the franchise system's trademark to lure unsuspsecting customers and then provide the customer's substandard service, to the detriment of the reputation associated with the trademark. These scholars argue that courts should analyze tying contracts under the Rule of Reason.

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[edit] Bibliography

Donald Turner, Tying Arrangements Under the Antitrust Laws, 72 Harv. L. Rev. 50 (1958);
George J. Stigler, A Note On Block Booking, 1963 Supreme Court Review 152;
Kenneth Dam, Fortner Enterprises v. United States Steel: Neither a Borrower Nor A Lender Be, 1969 S. Ct. Rev. 1;
Richard A. Posner, Antitrust: An Economic Perspective, 171-84 (1976);
Richard Craswell, Tying Requirements in Competitive Markets: The Consumer Protection Rationale, 62 Boston University L. Rev. 661 (1982);
Roy Kenney and Benjamin Klein, The Economics of Block Booking, 26 J. Law & Economics 497 (1983);
Victor Kramer, The Supreme Court and Tying Arrangements: Antitrust As History, 69 Minnesota L. Rev. 1013 (1985);
Benjamin Klein and Lester Saft, The Law and Economics of Franchise Tying Contracts, 28 J. Law and Economics 245 (1985);
Alan Meese, Tying Meets The New Institutional Economics: Farewell to the Chimera of Forcing, 146 U. Penn. L. Rev. 1 (1997);
John Lopatka and William Page, The Dubious Search For Integration in the Microsoft Trial, 31 Conn. L. Rev. 1251 (1999);
Keith A. Hylton and Michael Salinger, Tying Law and Policy: A Decision-Theoretic Approach, 69 Antitrust L. J. 469 (2001);
Christopher Leslie, Cutting Through Tying Theory with Occam's Razor: A Simple Explanation of Tying Arrangements, 78 Tul. L. Rev. 727 (2004).