Nicholas Economides DOI 10105797811372946780057 Palgrave Macmillan Please respect intellectual property rights This material is copyright and its use is restricted by our standard site license ter ID: 449810
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bundling and tying Nicholas Economides DOI: 10.1057/9781137294678.0057 Palgrave Macmillan Please respect intellectual property rights This material is copyright and its use is restricted by our standard site license terms and conditions (seehttp://www.palgraveconnect.com/pc/connect/info/terms_conditions.html). If you plan to copy, distribute or share in any formatincluding, for the avoidance of doubt, posting on websites, you need the express prior permission of Palgrave Macmillan. Torequest permission please contact rights@palgrave.com. bundlingandtyingTyingoftwoproducts(orservices)occurswhenasellersellsonegood(tyinggood)ontheconditionthatthebuyerbuystheothergood(tiedgood)fromthatsellerorimposesonthebuyertherequirementthats/hewillnotpurchasetheothergoodfromanotherseller.isageneraltermdescribingsellingcollectionsofgoodsasapackage.In 10.1057/9781137294678.0057 - bundling and tying, Nicholas Economides Copyright material from www.palgraveconnect.com - licensed to Palgrave Macmillan entitlement for Contributors - PalgraveConnect - 2015-05-29 262(1963);BrownShoeCo.v.UnitedStates,370U.S.294,370U.S.330(1962);UnitedStatesv.Loews,371U.S.38(1962);NorthernPaci“cR.Co.v.UnitedStates,356U.S.1,356U.S.5(1958);Blackv.MagnoliaLiquorCo.,355U.S.24,355U.S.25Times-PicayunePublishingCo.v.UnitedStates,345U.S.594,345U.S.608…609(1953);StandardOilCo.ofCaliforniav.UnitedStates,337U.S.293,337U.S.305…306(1949);InternationalSaltCo.v.UnitedStates,332U.S.392,332U.S.396(1947).Foranhistoricalperspectiveonthiscaselaw,Kramer(1985).Foranexplanationofwhythisamountstoaspeci“cformofruleofreasonreview,Elhauge(2009b)Inthelate1970s,prominentChicagoSchoolanti-trustscholars(Posner,Easterbrook,Bork)proposedinsteadthattyingshouldbepresumptivelyperselegal,allowingantitrustliabilityonlyinexceptionalcircumstances(seePosner,1976Bork,1978:375PosnerandEasterbrook,1981:802…810).Theyarguedthatamonopolistingoodhasnoreasontotieproductexceptwhentherearecostsavingsorotheref“cienciesinthejointproductionordistribu-tionof,becauseamonopolistinalreadyappropriatedallconsumersurplus.However,theirconclusionisincorrectwhen,withouttying,themonopolistcannotextractallconsumersurplusfromeachconsumerthroughperfectpricediscrimination,whichisalmostalwaysthecase(Economides,2012Itisalsoincorrectwhenthetieforeclosesasubstantialshareofthetiedmarketinawaythatincreasesthedegreeofmarketpowerinthetyingmarketorgivesthetying“rmmarketpowerinthetiedmarketthatitcanexploitagainstotherbuyers(Elhauge,2009bWeexamine“veset-upsofstrategictyingandbundlinguse.Tyingandbundlingtoextractconsumerssurplusthroughintra-productpricediscriminationWhenamonopolistingoodisunabletoimplementperfectpricediscriminationamongbuyers,andbuyersdifferinwillingnesstopayfor,thesellercanusetyingwithagood,theuseofwhichiscloselycorrelatedwiththevalueof,toextractmoreorallthesurplusof(see,forexample,InternationalBusinessMachinesCorp.v.UnitedStates,SupremeCourtoftheUnitedStates,1936.298U.S.131,56S.Ct.701,80L.Ed.1085,whereIBMimposedtherequirementtoleaseesofitstabulatingmachinestobuyitscards,reasoningthatcarduseiscloselycorrelatedwithvalueofmachinetocustomer).Thus,goodBisusedbothasameteringdeviceofthevalueofproductAaswellasadeviceforconsumersurplusextractionbybeingpricedsig-ni“cantlyabovecost.Tyingandbundlingtoextractconsumerssurplusthroughintra-consumerpricediscriminationWhenabuyerbuysmorethanoneunitofagoodandisleftwithapositiveconsumersurplusabsenttying(forexample,ifthemonopolistchargesasingle(monopoly)pricetoasellerandthesellerbuysmul-tipleunits),tyingcanbeusedtotransfertheremainingconsumersurplustotheseller.Supposethat,originally,productBwasofferedatacompetitiveprice.Tyingisimplementedasfollows:themonopolistsellerinrefusestoofferbyitselfbutoffersitonlywithproductwhichhenowsellsatanin”atedprice.Thebuyerwillacceptiftheconsumersurplusfrombeingabletocontinuebuyingatthemonopolypriceexceedstheharmfromhavingtobuyatanin”atedprice,butthebuyerisworseoffundertyingcomparedtothebut-forworld,andthesellerextractsadditionalsurplus(andhashigherpro“ts)bytying(seeMath-ewsonandWinter,1997Nalebuff,20042009Greenlee,ReitmanandSibley,2008Elhauge,2009b:407…413Economides,2012).Sincethepricedis-criminationimplementedthroughtyingisamongtheunitsboughtbythesameconsumerandisdoneseparatelyforeachconsumer,itdoesnotdependondifferencesacrossconsumers.Thetyingschemecanbeappliedevenifallbuyersareidenticalintheirvalua-tionsofthetwoproducts.Additionally,thereisnorequirementthatmarketpowerandmarketshareinthetiedmarketaresigni“cantbeforetyingstarts.However,oncethetyingschemeisineffect,theacceptancebymanybuyerstobuythetiedproductsand(ratherforegoaltogether)increasesthesellersmarketpowerinthetyingmarket.Inabundlingset-up,themonopolistsellersetsaprohibitivelyhighpriceforifsoldaloneandgivesadiscountonifthebuyerbuysasuf“cientlyhighshareofhisrequirementsfromthisseller.Theeffectofthebundlingrequirementcontractisverysimilartotheoneoftying.Tyingandbundlingcanimplementinter-productpricediscriminationtothedetrimentofconsumersInthetwocasesabove,monopolizationofthesecondmarketthoughtyingandbundlingistypicallynotthebundlingandtyingPalgraveMacmillan,adivisionofMacmillanPublishersLtd 10.1057/9781137294678.0057 - bundling and tying, Nicholas Economides Copyright material from www.palgraveconnect.com - licensed to Palgrave Macmillan entitlement for Contributors - PalgraveConnect - 2015-05-29 monopolistsmaingoal.However,therearesettingswheretheobjectiveoftyingandbundlingistheextractionofsurplusinthesecond(tiedgood)Inthepresenceofsubstantialmarketpowerinthetyingandtiedmarkets(seeSchmalensee,1982:Elhauge,2009b:406),whenconsumersbuytwogoodsandtheirdemandsdonothaveverystrongpositivecorrelation,introductionoftyingorbundledpricingcanincreasepro“tsandreduceconsumersurplus(seealsoAdamsandYellen,1976Schmalensee,1982McAfee,McMillanandWhinston,1989EconomidesandHebert,2008:465Elhauge,2009b:405…407,415Forillustration,supposethatconsumersaredis-tributeduniformlyaccordingtotypexin[0,100]sothatconsumerxhaswillingnesstopayp(x)forgoodandwillingnesstopay$100…p(x)forgoodAdditionally,letthewillingnesstopayforconsumeroftypexbeinverselyrelatedtohistype,p(x)=100…x.Then,ifthegoodsaresoldseparately,asingle-pricemonopolistwillcharge$50foreachofgoods,and,ineachofthesemarkets,consumersurpluswillbe$1250.However,ifaretiedina1:1ratio,thewillingnesstopayforis$100foreveryconsumer.Themonopolistcharges$100forthebundle,allconsumersbuythegood,andconsumersareleftwithzeroconsumersurplus.TyingandbundlingcanimpairrivalcompetitivenessTyingandbundling,includingunderaloyalty/requirementprogrammecanbeusedbyamonopolisttoforecloserivals,reducetheirscaleofopera-tions,andtherebyincreasetheirunitcostsandreducetheircompetitiveness(seeWhinston,1990Economides,2009:268EconomidesandLianos,2009:511…516Elhauge,2009b:413…419).Thiscanbepro“tableevenwhenproductsAandBaretiedin“xedproportionsorthetiedproducthasnootheruse(seeNalebuff,2004EconomidesandHebert,2008:466.AlsoseeAghionandBolton,1987showingthatamonopolistcanextractanewentrantstechnologyadvantageusingcontractswhichrequire100percentofacustomerstotalpurchases).Thisrequiresthatasubstantialshareofthetiedmarketbeforeclosed(seeElhauge,2009b:413…419).Creatingtiedmarketpowerwithtiescannotbepro“tableifthetieorbundleisin“xedproportionsandthetiedproducthasnouseotherthanwiththetyingproductElhauge,2009b:416).Facingasmallermarket,rivalswithentrycostsmaynotenterthetiedmarket,resultinginlesscompetitionandlowerconsumersurplus.Basedonthesameargument,acompanythatonlyproducesoneofthetiedproductsmayexitthemarketasaresultoftying.BundlingincontestableandcontestableunitsofasinglegoodSupposethatadominant“rminamarketsellsataconstantperunitprice.Providedtheparticularbuyercommitstobuyingalargepercentageorallofhisneedsfromthedominant“rm,theselleralsooffersaretroactivediscountonallunitsorasubsetofunitsbelowacertainthreshold,suchas90percentofthebuyerspurchasesinmarketduringade“nedtimeperiod.Thetermretroactiveisusedbecausethediscount(ordifferencebetweenpricesadheringtoandnotadheringtotherequirement)appliestoallunitssoldinatimeperiodoncethethresholdismet,eventopurchasesmadebeforethethresholdwasmet.Thisisdistinguishedfromanincrementaldiscountwhichisappliedonlytounitssoldafterthethresholdismet(forsimilarde“nitions,seeCommissionoftheEuropeanCommunities,Guidance42).Theretroactivediscountcanbealowerpriceonallunitsbelowthethresholdorasubsetofthese,oritcanbealumpsumdiscount.Therequirementmaybesole-sourcing,thatis,arequirementthataparticularbuyerbuys100percentofhispurchasesfromthedominant“rm,orthediscountmaybeavailableonlyifalargepercentageofthebuyerspurchasesinmarket,say90percent,arefromthedominant“rm.Therequirement,thebaseprices,theextentofthediscounts,andeventhetimeperiodonwhichitappliescanvaryacrossbuyers.Bundlingincontestableandcontestabledemandisverysimilartomultiproductbundlingandshouldbeanalysedverysimilarly(seeEconomides,2012).Inboththemulti-andsingle-productcases,thedomi-nant“rmleveragesitsmonopolyordominantposi-tiontoobtainhighersalesintheremainingmarket.(Thisconformswiththede“nitionsusedbytheEuropeanCommission.SeeEUArticle82GuidanceTheonlydifferenceisthat,inthemultiproductcase,salesinmarketareleveragedtoobtainhighersalesinmarket,while,inthesingle-productcase,thebundlingandtyingPalgraveMacmillan,adivisionofMacmillanPublishersLtd 10.1057/9781137294678.0057 - bundling and tying, Nicholas Economides Copyright material from www.palgraveconnect.com - licensed to Palgrave Macmillan entitlement for Contributors - PalgraveConnect - 2015-05-29 uncontestedsalesinmarketareleveragedtoobtainthecontestedsalesalsoinmarket.Someprominentsingle-productloyaltydiscountscasesaretheonesinvolvingIntel.IntheUS:AdvancedMicroDevices,Inc.v.IntelCorp.,No.05-441(D.Del.“led27June2005,settled12November2009);NewYorkv.IntelCorp.,1:2009cv00827(D.Del.“led4November2009)availableathttp://www.oag.state.ny.us/media_;center/2009/nov/NYAG_v_Intel_COMPLAINT_FINAL.pdf;Complaint,IntelCorp.,FTCDocketNo.9341(16December2009),availableathttp://www.ftc.gov/os/adjpro/d9341/091216intelcmpt.pdf.IntheEuropeanUnion,seeCommissionDecision,COMP/C-3/37.900…IntelCorp.,13May2009,availableathttp://ec.europa.eu/competition/sectors/ICT/intel.html.Intelinvolvedbothasingle-productloyaltyrequirementprogrammeaswellasaloyaltyrequirementpro-grammeonbundlesinvolvingchipsets.TheFTCcasewassettledwithIntelon29October2010(seetheproposedDecisionandOrderathttp://www.ftc.gov/os/adjpro/d9341/101102inteldo.pdfandtheAnalysisofProposedConsentOrderathttp://www.ftc.gov/os/adjpro/d9341/100804intelanal.pdf.SeeEconomides,2012Table1,adaptedfromEconomides(2012)marizestheeffectsoftyinginimplementingdifferenttypesofpricediscrimination.Giventheantitrustliabilityarisingfromtyingaswellasbundlingwithrequirementconditions,busi-nessesshould,ingeneral,avoidoffersthatcontainrestrictionsofthesetypes.Incontrast,“rmsmayofferquantitydiscountswhentheycanbereasonablybasedondecreasingunitcostswithscale.NICHOLASECONOMIDESSeealsoAdams,W.J.andYellen,J.L.1976.Commoditybundlingandtheburdenofmonopoly.QuarterlyJournalofEconomicsAghion,P.andBolton,P.1987.Contractsasabarriertoentry.AmericanEconomicReview77,388.Bork,R.1978.TheAntitrustParadox.NewYork:FreePress.Economides,N.2009.Loyalty/requirementrebatesandtheantitrustmodernizationcommission:Whatistheappropriateliabilitystandard?AntitrustBulletin54,259.Economides,N.2012.Tying,bundling,andloyalty/requirementrebates.InResearchHandbookontheEconomicsofAntitrustLaw,ed.E.Elhauge.London:EdwardElgar.Economides,N.andHebert,W.2008.Patentsandantitrust:applicationtoadjacentmarkets.JournalonTelecommunications&HighTechnologyLaw6,455.Economides,N.andLianos,I.2009.TheelusiveantitruststandardonbundlinginEuropeandintheUnitedStatesattheaftermathoftheMicrosoftcases.AntitrustLawJournal76,483.Elhauge,E.2008.UnitedStatesAntitrustLawandEconomicsCambridge,MA:HarvardUniversityPress.Elhauge,E.2009a.Thefailedresurrectionofthesinglemonopolypro“ttheory.CompetitionPolicyInternationalElhauge,E.2009b.Tying,bundleddiscounts,andthedeathofthesinglemonopolypro“ttheory.HarvardLawReviewEUArticle82GuidanceGrzeenlee,P.,Reitman,D.S.andSibley,D.S.2008.Anantitrustanalysisofbundledloyaltydiscounts.InternationalJournalofIndustrialOrganization26,1132.Kramer,V.H.1985.TheSupremeCourtandtyingarrangements:antitrustashistory.MinnesotaLawReview69,1013.McAfee,R.P.,McMillan,J.andWhinston,M.D.1989.Multiproductmonopoly,commoditybundling,andcorrelationofvalues.QuarterlyJournalofEconomics104,371.Mathewson,F.andWinter,R.1997.Tyingasaresponsetodemanduncertainty.RANDJournalofEconomics28,566.Nalebuff,B.2004.Bundlingasanentrybarrier.QuarterlyJournalofEconomics119,159.Nalebuff,B.2009.Pricediscriminationandwelfare.CompetitionPolicyInternational5,221. Table1SummaryofrequirementsandeffectsoftyinginimplementingdifferenttypesofpricediscriminationTypeofpricediscrimina-tionthattyingSigniÞcantmarketpowerinthetyingmarketMarketpowerinthetiedmarketandforeclosureinthetiedmarketTyinggivesadditionalproÞtstomonopolistevenwhenAandBaredemandedinÞxedConsumersurplus(CS)candecreasebecauseofInter-productpricediscriminationNecessaryfortyingresultinginCSreductionNecessaryfortyingresultinginCSreductionYesYesIntra-productpricediscriminationNecessaryfortyingresultinginCSreductionUnnecessaryfortyingresultinginCSreductionYesIntra-consumerpricediscriminationNecessaryfortyingresultinginCSreductionUnnecessaryfortyingresultinginCSreductionYesbundlingandtyingPalgraveMacmillan,adivisionofMacmillanPublishersLtd 10.1057/9781137294678.0057 - bundling and tying, Nicholas Economides Copyright material from www.palgraveconnect.com - licensed to Palgrave Macmillan entitlement for Contributors - PalgraveConnect - 2015-05-29 Posner,R.A.1976.AntitrustLaw:AnEconomicPerspectiveChicago:ChicagoUniversityPress.Posner,R.andEasterbrook,F.1981.AntitrustCases,EconomicNotes,andOtherMaterials(2ndedn).StPaul,MN:WestPublishingCo.Rubinfeld,D.L.2005.3Msbundledrebates:aneconomicUniversityofChicagoLawReview72,243.Schmalensee,R.1982.Commoditybundlingbysingle-productJournalofLaw&Economics25,67.Schmalensee,R.1984.GaussiandemandandcommodityJournalofBusiness57,211.Whinston,M.D.1990.Tying,foreclosure,andexclusion.AmericanEconomicReview80,838.bundlingandtyingPalgraveMacmillan,adivisionofMacmillanPublishersLtd 10.1057/9781137294678.0057 - bundling and tying, Nicholas Economides Copyright material from www.palgraveconnect.com - licensed to Palgrave Macmillan entitlement for Contributors - PalgraveConnect - 2015-05-29