Tying (commerce)

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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). It is often illegal when the products are not naturally related, e.g., requiring a bookstore to stock up on an unpopular title before allowing them to purchase a bestseller. Tying is related to Freebie marketing, which was pioneered by King C. Gillette and is a common (and legal) method of giving away (or selling at a substantial discount) one item to ensure a continual flow of sales of another related item (for example, the disposable safety razor).

Some kinds of tying, especially by contract, have historically been regarded as anti-competitive practices. The basic idea is that consumers are harmed by being forced to buy an undesired good (the tied good) in order to purchase a good they actually want (the tying good), and so would prefer that the goods be sold separately. The company doing this bundling may have a significantly large market share so that it may impose the tie on consumers, despite the forces of market competition. The tie may also harm other companies in the market for the tied good, or who sell only single components.

Middle managers who oversee less attractive product lines are frequently responsible for initiating or attempting to initiate the tying of their products to higher quality products in the company's portfolio as a desperate effort to prevent the extinction of the product line and their job.

Tying may also be a form of price discrimination: people who use more blades, for example, pay more than those who just need a one-time shave. Though this may improve overall welfare, by giving more consumers access to the market, such price discrimination can also transfers consumer surplus to the producer. Tying may also be used with or in place of patents or copyrights 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, the supplier can increase sales of less necessary products.

In the United States, most states have laws against tying, which are enforced by state governments. In addition, the United States Department of Justice enforces federal laws against tying through its Antitrust Division.

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[edit] Types of tying

Horizontal tying is the practice of requiring customers to pay for an unrelated product or service together with the desired one, for example, if all of Bic's pens were sold only with Bic lighters. (However, a company may offer a limited free item with another purchase as a promotion.)

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 fuel 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.

[edit] Tying in United States Law

Certain tying arrangements are illegal in the United States under both the Sherman Antitrust Act,[1], and Section 3 of the Clayton Act.[2] A tying arrangement is defined as "an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees he will not purchase the product from any other supplier."[3] Tying may be the action of several companies as well as the work of just one firm. Success on a tying claim typically requires proof of four elements: (1) two separate products or services are involved; (2) the purchase of the tying product is conditioned on the additional purchase of the tied product; (3) the seller has sufficient market power in the market for the tying product; (4) a not insubstantial amount of interstate commerce in the tied product market is affected.[4]

For at least three decades, the Supreme Court defined the required "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.[5] The Supreme Court has since held that a plaintiff must establish the sort of market power necessary for other antitrust violations in order to prove sufficient "economic power" necessary to establish a per se tie. [6] More recently, the Court has eliminated any presumption of market power based solely on the fact that the tying product is patented or copyrighted.[7]

The most prominent recent case involving a tying claim (among many others) was United States v. Microsoft.[8] By some accounts, Microsoft ties together Microsoft Windows, Internet Explorer, Windows Media Player, Outlook Express and Microsoft Office. The United States claimed that the bundling of Internet Explorer (IE) to sales of Windows 98, making IE difficult to remove from Windows 98 (e.g., not putting it on the "Remove Programs" list), and designing Windows 98 to work "unpleasantly" with Netscape Navigator constituted an illegal tying of Windows 98 and IE.[9] Microsoft's counterargument was that a web browser and a mail reader are simply part of an operating system, included with other personal computer operating systems, and the integration of the products was technologically justified. Just as the definition of a car has changed to include things that used to be separate products, such as speedometers and radios, Microsoft claimed the definition of an operating system has changed to include these formerly separate products. The United States Court of Appeals for the District of Columbia Circuit rejected Microsoft's claim that Internet Explorer was simply one facet of its operating system, but the court held that the tie between Windows and Internet Explorer should be analyzed deferentially under the Rule of Reason.[10] The U.S. government claim settled before reaching final resolution.

As to the tying of Office, parallel cases against Microsoft brought by State Attorneys General included a claim for harm in the market for office productivity applications.[11] The Attorneys General abandoned this claim when filing an amended complaint. The claim was revived by Novell where they alleged that computer OEMs were charged less for their Windows bulk purchases if they agreed to bundle Office with every PC sold but that if they gave computer purchasers the choice whether or not to buy Office along with their machines, the OEM's bulk prices for Windows would rise, making their computer prices less competitive in the market. The Novell litigation is still ongoing.[12]

[edit] Criticism of laws banning tying

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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 of economic thought, 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 franchiser 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 unsuspecting customers and then provide the customer 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.

[edit] Notes

  1. ^ See N. Pac. Ry Co. v. United States, 356 U.S. 1 (1958); International Salt Co. v. United States, 332 U.S. 392 (1947)
  2. ^ 15 U.S.C. s. 14
  3. ^ N. Pac. Ry. Co. v. United States, 356 U.S. 1, 5-6 (1958)
  4. ^ Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 461–62 (1992)
  5. ^ See Fornter Enterprises v. United States Steel, 394 U.S. 495 (1969); United States v. Loew's, Inc. 372 U.S. 38 (1962)
  6. ^ See Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1985)
  7. ^ See Illinois Tool Works v. Independent Ink, 547 U.S. 28 (2006)
  8. ^ See United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001).
  9. ^ Id. at 64-67, 84-86.
  10. ^ See United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001).
  11. ^ See Complaint filed in New York v. Microsoft Corp. PP 88-95, 98, 117-19, No. 98-1233 (D.D.C. filed May 18, 1998)
  12. ^ See Civil No. JFM-05-1087.

[edit] See also

[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);
  • Joseph Bauer, A Simplified Approach to Tying Arrangements: A Legal and Economic Analysis, 33 Vanderbilt Law Review 283 (1980);
  • 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);
  • Christopher Leslie, Unilaterally Imposed Tying Arrangements and Antitrust's Concerted Action Requirement, 60 Ohio St. L.J. 1773 (1999);
  • John Lopatka and William Page, The Dubious Search For Integration in the Microsoft Trial, 31 Conn. L. Rev. 1251 (1999);
  • Alan Meese, Monopoly Bundling in Cyberspace: How Many Products Does Microsoft Sell?, 44 Antitrust Bull. 65 (1999);
  • Keith N. Hylton and Michael Salinger, Tying Law and Policy: A Decision-Theoretic Approach, 69 Antitrust L. J. 469 (2001);
  • Michael D. Whinston, Exclusivity and Tying in U.S. v. Microsoft: What We Know, and Don't Know, 15 Journal of Economic Perspectives, 63-80 (2001);
  • Christopher Leslie, Cutting Through Tying Theory with Occam's Razor: A Simple Explanation of Tying Arrangements, 78 Tul. L. Rev. 727 (2004).