Author(s)
Source
CESifo Working Paper Series No. 1336, November 2004
Summary
Are consumers harmed when a firm requires or encourages customers to purchase product B when they buy product A?
Policy Relevance
Antitrust law long assumed that "tying" was bad. Some economists argue that the law should assume that tying usually benefits consumers ("per se legality"). This paper argues courts must look at each case closely ("rule of reason").
Main Points
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This paper asks how tying might affect firms’ decisions to spend money on research and development. A tying firm might spend more on R&D and recover these costs by selling both products. A firm that does not tie might spend less.
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More R&D can make us better off, by giving us more product choices. Or it can make us worse off, if firms waste resources duplicating each other’s efforts.
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The paper argues that if two firms merge, the new firm will tend to offer more discounts on bundled goods. Rivals might go out of business. Whether this is good or bad depends on how much competition and choice remains.
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The Microsoft case is an example of a tying firm serving two different sets of customers, end users and software developers (a “two-sided” market). If tying brings developers into the market, it makes us better off, but not if consumers’ choices are reduced too much.
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Because tying is so complex, courts should not assume it is good or bad (a “per se” rule), but should look closely at each case (a “rule of reason” approach).