When is tying illegal

There is no reason to believe that practices that generate efficiencies when firms lack market power do not generate those same efficiencies when firms possess market power. We do not believe that economic theory or empirics are refined enough to distinguish procompetitive from anticompetitive tying in practice--a point that is echoed by several of the authors of theories of tying.

In a recent study, Barry Nalebuff and David Majerus have evaluated 13 legal cases in which bundling and tying were the issues. Where we should be between the rule of reason and modified per se legality is a harder judgment. We leave that question for another day. It may be that certain classes of tying arrangements should fall into modified per se legality--that is the case with technological tying cases under U.

It may be that other classes of tying cases-- contractual ties by firms with significant market power--should fall under rule of reason. It is also quite possible that applying the structured rule of reason approach we have suggested will lead, de facto, to modified per se legality if, in practice, tying arrangements do not pass the first two screens. Having reviewed the development of legal and economic thinking on tying in both the United States and the European Union, we are now in the position to draw the following conclusions.

Contrary to conventional and legal wisdom, we find that there is no intellectual gulf between the Chicago and post-Chicago economic schools. Most economists now would agree on three fundamentals. First, tying is a pervasive practice that, in many instances, gives rise to substantial efficiencies, particularly when it takes the form of product integration.

Second, the circumstances in which tying would lead to anticompetitive effects are very restricted. And third, not only are those conditions hard to verify, but also any attempt to balance efficiency gains against possible anticompetitive effects will prove a complex exercise.

Plaintiffs and competition authorities that look toward modern economic theories of tying to bolster the harsh per se prohibitions against tying would be well advised to look at the "product warnings"--quoted above--that economic scholars have placed on their theories. No serious economic writing supports a per se rule and most recognize the difficulty of discerning anticompetitive tying at all.

This consensus among economists has important policy implications. The recognition of efficiencies as well as possible anticompetitive effects suggests that per se rules are conceptually inappropriate for the analysis of tying. In other words, economic theory points to a rule of reason approach along the lines suggested in our three-stage analysis see section VI. But, as is evident from our suggested methodology, such an analysis is resource-intensive and may prove inconclusive.

The competition authorities, therefore, have the difficult choice between an approach that is conceptually sound but subject to considerable practical difficulties and an approach that is conceptually second-best but is easier to implement. This decision should consider whether the conceptual errors under the per se rule are more problematic than the implementation errors that would result from a rule of reason. Of the three policy options opened to the authorities, per se prohibition is clearly the least attractive.

It would kill a large number of efficiency-enhancing practices with no anticompetitive effects to catch just a small number of anticompetitive effects. The remaining choice between a rule of reason approach and per se legality is more difficult and, as we have suggested, may depend on the class of tying arrangements technological vs.

In antitrust, it generally takes time for developments in economic theory to lead to corresponding changes in competition policy. The time lag has proved to be particularly long for tying. The hostility of the antitrust approach toward tying on both sides of the Atlantic still reflects to a greater or lesser extent elements of pre-Chicago school thinking. Despite the persistent pre-Chicago school elements in both the U. Clearly, Microsoft III is not yet the end of the line.

It should be the beginning of the line in the European Union. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. We are grateful to Microsoft for financial support of our research. Please e-mail comments to: Christian. Ahlborn linklaters. Evans nera.

Padilla nera. Standard Oil Co. United States, U. Jefferson Parish Hospital Dist. Hyde, U. United States v. Microsoft Corp. The appeals court had heard two previous and somewhat related cases. In United States v. Circuit Court of Appeals found that Microsoft had not violated the consent decree because it was held that Windows was an integrated product of which Internet Explorer was a part.

Especially for multinationals the legal treatment of tying is important in these two jurisdictions. Percentages are based on authors' calculations. Many companies have to design products and conduct themselves under the more restrictive of these two sets of laws since the cost of customizing to products and business practices can be prohibitive.

Northern Pacific Railway Co. Standard Oil Co, et al. Jefferson Parish-Hospital Dist. United States Steel Corp. Fortner Enterprises, U. See 15 U. International Salt Co. Loew's Inc. Fortner Enterprises, Inc. See Northern Pacific Railway Co. Motion Picture Patents Co. Universal Film Manufacturing Co.

Arlie Mack Moore et al. Times-Picayune Publishing Co. Jerrold Electronics Corp. International Business Machines Corp. See Telex Corp. Eastman Kodak Co. Image Technical Services, Inc. Whether competitive harm can be expected is then considered in the second test under Jefferson Parish, namely the test of forcing through market power.

See United States v. Warren-Boulton, Nov. Fisher, Jan. Microsoft proposed a test that a three-judge panel of the court of appeals had used to analyze software integration under a consent decree that Microsoft had entered into with the Justice Department to settle a previous case. That test stated that technological tying is presumed legal if the defendant can show a "plausible claim" of benefits from the tie. See id. The court, sitting en bane, rejected this as well.

Broadcast Music, Inc. Columbia Broadcasting System, Inc. Microsoft HI, supra note 4, at quoting United States v.

Topco Assocs. The Justice Department and nine states entered into a consent decree with Microsoft that the court approved after a Tunney Act hearing. Nine states and the District of Columbia sought further relief that was denied.

Two of those nine states are pursuing an appeal. However, since all plaintiffs agreed to drop the tying claim it would not appear that the claim could be the basis for any appeal to the Supreme Court. Microsoft, U. See, e. C , at article Napier Brown v. Hilti's patent protection for nail guns was due to expire between and , depending on the country and patent feature involved.

Hilti also obtained patents for certain nails in all member states except Denmark. At the time of the investigation these patents had expired in some member states and were due to expire in all member states by Commission E. IBM also undertook to disclose, in a timely manner, sufficient interface information to enable competitors to produce IBM-compatible hardware and software.

C , at article 82 2 d. David S. Chicago economists also noted that tie-ins can be used to accomplish price discrimination. Economic theory has shown that price discrimination can, in principle, be pro- or anticompetitive, depending upon a series of structural factors, but that it is most often welfare increasing. See Dennis W. Perloff, Modern Industrial Organization 3d ed. Hence, tying practices aimed at facilitating price discrimination should be typically considered welfare increasing and thus procompetitive.

This is more or less the case under U. See Richard Whish, Competition Law 4th ed. See Steven J. Davis, Kevin M. Evans ed. See David. Evans, A. According to Jupiter Communications--an information-technology consulting company--in , almost a third of all stock trading would take place over the Internet. Jerry A. Gordon eds. Bruce M. Waldman, Video Economics Holding dosage, ingredients, and delivery system tablets, capsules, etc.

The single monopoly profit theorem fails to hold when the two goods are consumed in variable proportions. Trying to extract the rents generated in the tied market through the pricing of the monopoly product is not a valid strategy in that case, since consumers would substitute away from the monopoly product. However, that does not imply that tying is necessarily anticompetitive when goods are consumed in variable proportions. On the contrary, it is precisely under such kinds of consumer preferences that the monopolist has an interest in tying to price discriminate efficiently.

See supra note Even if both markets are monopolized, welfare could still be enhanced through elimination of the double marginalization problem or through price discrimination.

The critical observation here is that consumers can benefit even when tying and bundling are conducted by a firm with market power. Michael D. Whinston, Tying, Foreclosure and Exclusion, 80 Am. Or, in the context of product differentiation, of higher quality versions of product B. Dennis W. The authors cite as an example a computer primary good and a printer complementary good. In a recent study for the U.

K's Department of Trade and Industry, Nalebuff suggests a similar conclusion. Keith N. That is, tying is privately profitable but potentially detrimental from a social viewpoint. In the language of formal logic, the conditions listed below are not necessary and much less sufficient for tying to be anticompetitive. Otherwise, a the tying firm may not benefit by as much from the exclusion of its competitor s in the tied market, or b its competitors in the tied and tying markets may cooperate to match the tie, thus defeating the exclusionary purposes of the tying firm.

See Whinston, supra note Otherwise, the Chicago's one monopoly profit theorem likely will hold. See Nalebuff, supra note Nalebuff shows that, under certain conditions, competitors may not match the bundle of the incumbent even when they have the ability to do so.

And in some other cases, matching tying may turn out to be inefficient even if it prevents market foreclosure. This screen must be preceded by a careful market definition analysis to identify the precise boundaries of the tying and tied markets and the competitive constraints faced by the companies operating in each of them.

We have encountered a number of situations in which some participants in a case leap from the proposition that tying could be anticompetitive to the conclusion that tying is anticompetitive without checking whether the assumptions made by the theory hold in the matter at hand. That is, if the consumer purchases a bundle consisting of one unit of the monopolist's primary good and the one unit of its complementary good, then the consumer cannot add a unit of the potential entrant's complementary good to the bundle.

Likewise, the anticompetitive results in Whinston hold only for some parameterizations of the models that are hard to verify in practice. Further research is needed in this area so that we can move from "exemplifying theory" to a theory constructed around propositions establishing the general necessary and sufficient conditions for tying to be welfare reducing.

Whinston, supra note , at emphasis added. BM Corp. Likewise, Whinston states, "What is striking about the area of exclusive contracts and tying, however, is how little the current literature tells us about what these effects are likely to be. This state of non knowledge is, I think, responsible to a significant degree for the very strong but differing beliefs that economists often have about whether exclusive contracts and tying are likely to have welfare- reducing anticompetitive effects.

Whinston, Exclusivity and Tying in U. See part 2 of the study by Nalebuff, supra note The court decisions have focused on market leverage, while we find the first two explanations more compelling. See Nalebuff, supra note , at You are here Home » Antitrust Division.

For an official signed copy, please contact the Antitrust Documents Group. Introduction Tying exists when the seller of a product requires his purchasers to take another product as well. Bork noted in his famous book, Every person who sells anything imposes a tying arrangement. This is true because every product or service could be broken down into smaller components capable of being sold separately, and every seller refuses at some point to break the product down any further.

The per se illegality approach Early cases viewed tying arrangements largely as a means of restricting competition, with few, if any, redeeming features. The modified per se approach In Jefferson Parish 37 four Justices sought a rule of reason approach. If each of the products may be purchased separately in a competitive market, one seller's decision to sell the two in a single package imposes no unreasonable restraint on either market, particularly if competing suppliers are free to sell either the entire package or its several parts.

Buyers often find package sales attractive; a seller's decision to offer such packages can merely be an attempt to compete effectively--a conduct that is entirely consistent. Instead, the Court focused on the character of demand for the two products: [I]n this case, no tying arrangement can exist unless there is a sufficient demand for the purchase of anesthesiological services separate from hospital services to identify a distinct product market in which it is efficient to offer anesthesiological services separately from hospital services.

The reasoning of the court of appeals runs along the following lines: First, consumers value choice: "assuming choice is available at zero cost, consumers will prefer it to no choice. This condition is due to the fact that the separate-product test both as consumer demand test and as industry custom test is backward looking, or as the court of appeals put it in Microsoft III: The direct consumer demand test focuses on historic consumer behavior, likely before [technological tying], and the industry custom test looks at firms that, unlike the [tying firm] may not have integrated the tying and the tied goods.

Both tests compare incomparables--the [tying firm's] decision to bundle in the presence of integration, on the one hand, and the consumer and competitor calculations in its absence, on the other. It is unclear how the benefits from IE APIs could be achieved by quality standards for different browser manufacturers.

EC tying law: old cases, old ideas Contrary to U. EC case law 1. In addition, these policies all have the object or effect of excluding independent nail makers who may threaten the dominant position Hilti holds. Analysis of tying under EC law As mentioned earlier, it is difficult to assess the EC policy of tying on the basis of a mere handful of slightly outdated cases.

Nevertheless, some conclusions can be drawn: First, the European Commission and European courts seem to have adopted a "unified" approach to the different forms of tying, in other words, contractual tying including the tying of primary products and consumables and the integration of products have been assessed in the same way without taking into account the different underlying effects on competition and efficiency considerations for example, the use of consumables as a metering device.

As the U. It is therefore necessary to take a closer look at how each of the stages has been assessed in practice. Furthermore, the Commission made clear that a finding of dominance in a market for consumables was not necessarily dependent on a finding of dominance in the primary market, as evidenced in Hilti: Even if it were correct as Hilti argues that nail guns form part of a wider market and compete with other fixing methods in general, this would not alter the analysis given above as far as the relevant markets for Hilti-compatible nails and cartridge strips in particular are concerned and Hilti's dominance thereof.

For the independent producers of these consumables the relevant markets on which they compete are those for Hilti-compatible consumables. Even usage that is acceptable in a normal situation, on a competitive market, cannot be accepted in the case of a market where competition is already restricted. The Commission rejected Hilti's justification on a number of grounds, focusing predominantly on the safety aspects: The Commission regarded the existing safety controls and standards in the EU as adequate safeguards rendering Hilti's argument concerning safety invalid.

Where Europe stands. And why There are a number of possible explanations for the position of EC competition policy in relation to tying and the divergence with respect to the current U.

As Evans and Salinger point out: the DG-Comp's analysis reflects a reversion to pre-Chicago thinking in which some courts presumed that a harm to competitors necessarily resulted in a harm to competition and consumers. Whether dressed up in a formal model or not, both ultimately come down to that what is bad for a competitor must be bad for competition.

Lessons from economic theory and evidence Modem economic thinking largely supports the adoption of the rule of reason approach to the analysis of tying cases adopted by the D. The Chicago school A few decades ago, economists associated with the Chicago school explained how tying could provide increased convenience and lower transaction costs.

The computer monopolist can rent the computer for 90 cents a second and allow the user to buy cards in the open market for 1 cent a card or, if tying is permitted, he can require the user to buy cards from him at 10 cents a card--but in that case he must reduce his machine rental charge to nothing, so what has he gained?

Post-Chicago theories The contribution of the Chicago school to the tying doctrine was to give the efficiency motivations described above their proper place in antitrust analysis, and to reorient the thinking of competition authorities toward understanding that tying and bundling behavior was likely to be procompetitive as a result of reducing cost or improving quality. Whither tying law?

Implementing a structured rule of reason approach Unfortunately, the game-theoretic models developed by post-Chicago economists do not provide a universally valid set of conditions that could be used by competition authorities as a safe checklist in their rule of reason analyses of tying.

For example, the courts would have to weigh any potential efficiencies from the tie with possible losses due to foreclosure, which by itself is challenging due to the difficulty of measuring both the relevant efficiencies and the relevant losses. The choice of legal standard The best legal standard is, of course, one that perfectly ferrets out anticompetitive ties from procompetitive ones.

As Whinston noted in While the analysis vindicates the leverage hypothesis on a positive level, its normative implications are less clear. Even in the simple models considered here, which ignore a number of other possible motivations for the [tying] practice, the impact of this exclusion on welfare is uncertain.

This fact, combined with the difficulty of sorting out the leverage-based instances of tying from other cases, makes the specification of a practical legal standard extremely difficult. Conclusion Having reviewed the development of legal and economic thinking on tying in both the United States and the European Union, we are now in the position to draw the following conclusions.

Robert H. Bork, The Antitrust Paradox See Microsoft III, supra note 4. Are you convinced by the competitive justifications for tying arrangements? ABC Corp sells a particular type of widget. The widget is compatible with components sold by lots of other vendors.

What factors will the court review in determining whether this situation is illegal? Written by Jason Gordon Updated at September 26th, Contact Us If you still have questions or prefer to get help directly from an agent, please submit a request. Please fill out the contact form below and we will reply as soon as possible. Discussion Question How do you feel about tying relationships between products?

For example, motion picture distributors frequently tie the sale of popular video cassettes to the purchase of second-rate films that are piling up in their warehouses for lack of demand. Such arrangements tend to restrain competition by requiring buyers to purchase inferior goods that they do not want or more expensive goods that they could purchase elsewhere for less.

In addition, competitors may reduce their prices to below market level to attract purchasers away from prospective tying arrangements. Competitors who sell their products at below-market prices for an extended period can suffer enormous losses or go out of business. Not every tying arrangement is illegal under the law of unfair competition. Four elements must be proved to establish that a particular tying arrangement is illegal.

First, the tying arrangement must involve two different products. Manufactured products and their component parts, such as an automobile and its engine, are not considered different products and may be tied together without violating the law.

However, the law does not permit a shoe manufacturer to tie the purchase of promotional T-shirts to the sale of athletic footwear because these items are considered unrelated. Second, the purchase of one product must be conditioned on the purchase of another product.