Tying (commerce)

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.

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.

Tying in United States Law

Certain tying arrangements are illegal in the United States under both the Sherman Antitrust Act,, and Section 3 of the Clayton Act. 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." 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.

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. 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. More recently, the Court has eliminated any presumption of market power based solely on the fact that the tying product is patented or copyrighted.

The most prominent recent case involving a tying claim (among many others) was United States v. Microsoft. 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. 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. 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. 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.

The Bank Holding Company Act's Anti-Tying Provision

In 1970, Congress enacted section 106 of the Bank Holding Company Act Amendments of 1970 (BHCA), the anti-tying provision, which is codified at 12 U.S.C. § 1972. The statute was designed to prevent banks, whether large or small, state or federal, from imposing anticompetitive conditions on their customers. Tying, of course, is an antitrust violation, but the Sherman and Clayton Acts did not adequately protect borrowers from being required to accept conditions to loans issued by banks; and section 106 was specifically designed to apply to and remedy such bank misconduct.

Banks are allowed to take measures to protect their loans and to safeguard the value of their investments, such as requiring security or guaranties from borrowers. The statute exempts so-called “traditional banking practices” from its per se illegality, and thus its purpose is not so much to limit banks' lending practices, as it is to ensure that the practices used are fair and competitive. A majority of claims brought under the BHCA are denied. Banks still have quite a bit of leeway in fashioning loan agreements, but when a bank clearly steps over the bounds of propriety, the plaintiff is compensated with treble damages.

At least four regulatory agencies including the Federal Reserve Board oversee the activities of banks, their holding companies, and other related depository institutions. While each type of depository institution has a “primary regulator,” the nation’s “dual banking” system allows concurrent jurisdiction among the different regulatory agencies. With respect to the anti-tying provision, the Fed takes the preeminent role in relation to the other financial institution regulatory agencies, which reflects that fact that it was considered the least biased (in favor of banks) of the regulatory agencies when section 106 was enacted.

Criticism of laws banning tying

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.

See also

• Complementary good
• Iunctim
• Loss leader
• Product bundling
• Product churning
• Vendor lock-in

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;
• Timothy D. Naegele, Are All Bank Tie-Ins Illegal?, 154 Bankers Magazine 46 (1971);
• 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);
• Timothy D. Naegele, The Anti-Tying Provision: Its Potential Is Still There, 100 Banking Law Journal 138 (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); and
• Timothy D. Naegele, The Bank Holding Company Act's Anti-Tying Provision: 35 Years Later, 122 Banking Law Journal 195 (2005).