Tying
Encyclopedia
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, for example 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.
One effect of tying can be that low quality products achieve a higher market share than would otherwise be the case. For example in the UK an example of tying is a discount for customers who lease a telephone line, get satellite television and get broadband access from the same company. This discourages customers from getting broadband from another company even though the reliability of the service may be superior, as the loss of the discount can mean a substantial increase in total cost.
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 transfer consumer surpluses to the producer. Tying may also be used with or in place of patent
s or copyright
s to help protect entry into a market, discouraging 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
.
'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 together, from the same company. For example, a company mandating that its automobiles 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.
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.
In recent years, changing business practices surrounding new technologies have put the legality of tying arrangements to the test.
on June 29, 2007, it was sold exclusively with AT&T (formerly Cingular) contracts in the United States. To enforce this exclusivity, Apple employed a type of software "lock" that ensured the phone would not work on any network besides AT&T's. Related to the concept of bricking, any user who tried to unlock or otherwise tamper with the locking software ran the risk of rendering their iPhone permanently inoperable.
This caused complaints among many consumers, as they were forced to pay an additional early termination fee of $175 if they wanted to unlock the device safely for use on a different carrier.
Other companies such as Google
complained that tying encourages a more closed access based wireless service. Many questioned the legality of the arrangement, and in October 2007 a class-action lawsuit was filed against Apple, claiming that its exclusive agreement with AT&T violates California antitrust law. The suit was filed by the Law Office of Damian R. Fernandez on behalf of California resident Timothy P. Smith, and ultimately sought to have an injunction issued against Apple to prevent it from selling iPhones with any kind of software lock.
In July 2010, federal regulators clarified the issue when they determined it was lawful to hack (or in other terms, "jail break") the iPhone, declaring that there was no basis for copyright law to assist Apple in protecting its restrictive business model.
Jail breaking is a common term used to describe a situation in which a person hacks into the operating system
of an iPhone (or other device) in an attempt to unlock it. If done successfully, this would allow the hacker to run any application on the phone they choose, including applications not authorized by Apple. Apple told regulators that modifying the iPhone operating system leads to the creation of an infringing derivative work
that is protected by copyright law. This means that the license on the operating system forbids software modification. Regulators agreed that the activity of an iPhone owner who modifies his or her iPhone's firmware/operating system in order to enable it to run an application that Apple has not approved, but that the iPhone owner wishes to run on the iPhone, fits comfortably within the four corners of fair use
.
. 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 speedometer
s 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 manufacterers of computers ("OEM
s") were charged less for their Windows bulk purchases if they agreed to bundle Office with every PC sold than if they gave computer purchasers the choice whether or not to buy Office along with their machines — making their computer prices less competitive in the market. The Novell litigation is still ongoing.
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.
, 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 failure
s 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
.
De facto
De facto is a Latin expression that means "concerning fact." In law, it often means "in practice but not necessarily ordained by law" or "in practice or actuality, but not officially established." It is commonly used in contrast to de jure when referring to matters of law, governance, or...
or de jure
De jure
De jure is an expression that means "concerning law", as contrasted with de facto, which means "concerning fact".De jure = 'Legally', De facto = 'In fact'....
customer conditional on the purchase of a second distinctive good (the tied good). It is often illegal when the products are not naturally related, for example requiring a bookstore to stock up on an unpopular title before allowing them to purchase a bestseller. Tying is related to Freebie marketing
Freebie marketing
Freebie marketing, also known as the razor and blades business model, is a business model wherein one item is sold at a low price in order to increase sales of a complementary good, such as supplies or software...
, which was pioneered by King C. Gillette
King C. Gillette
King Camp Gillette was an American businessman popularly known as the inventor of the safety razor, although several models were in existence prior to Gillette's design...
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
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
, have historically been regarded as anti-competitive practices
Anti-competitive practices
Anti-competitive practices are business or government practices that prevent or reduce competition in a market .- Anti-competitive practices :These can include:...
. 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.
One effect of tying can be that low quality products achieve a higher market share than would otherwise be the case. For example in the UK an example of tying is a discount for customers who lease a telephone line, get satellite television and get broadband access from the same company. This discourages customers from getting broadband from another company even though the reliability of the service may be superior, as the loss of the discount can mean a substantial increase in total cost.
Tying may also be a form of price discrimination
Price discrimination
Price discrimination or price differentiation exists when sales of identical goods or services are transacted at different prices from the same provider...
: 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 transfer consumer surpluses to the producer. Tying may also be used with or in place of patent
Patent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....
s or copyright
Copyright
Copyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time...
s to help protect entry into a market, discouraging 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
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, most states
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
have laws against tying, which are enforced by state governments. In addition, the United States Department of Justice
United States Department of Justice
The United States Department of Justice , is the United States federal executive department responsible for the enforcement of the law and administration of justice, equivalent to the justice or interior ministries of other countries.The Department is led by the Attorney General, who is nominated...
enforces federal laws against tying through its Antitrust Division
United States Department of Justice Antitrust Division
The United States Department of Justice Antitrust Division is responsible for enforcing the antitrust laws of the United States. It shares jurisdiction over civil antitrust cases with the Federal Trade Commission and often works jointly with the FTC to provide regulatory guidance to businesses...
.
Types of tying
Horizontal tying is the practice of requiring consumers to pay for an unrelated product or service together with the desired one. For example, if all of BicSociété Bic
Société Bic is a company based in Clichy, France, founded in 1945, by Baron Marcel Bich known for making disposable products including lighters, magnets, ballpoint pens, shaving razors and watersports products. It competes in most markets against Faber-Castell, Global Gillette, Newell Rubbermaid...
'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 together, from the same company. For example, a company mandating that its automobiles 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
Magnuson-Moss Warranty Act
The Magnuson–Moss Warranty Act is a United States federal law, . Enacted in 1975, it is the federal statute that governs warranties on consumer products. The Act was sponsored by Senator Warren G. Magnuson of Washington and U.S. Rep John E...
in the United States.
In United States law
Certain tying arrangements are illegal in the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
under both the Sherman Antitrust Act
Sherman Antitrust Act
The Sherman Antitrust Act requires the United States federal government to investigate and pursue trusts, companies, and organizations suspected of violating the Act. It was the first Federal statute to limit cartels and monopolies, and today still forms the basis for most antitrust litigation by...
, 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.
In recent years, changing business practices surrounding new technologies have put the legality of tying arrangements to the test.
Tying of Apple products
The tying of Apple products is an example of commercial tying that has caused recent controversy. When Apple initially released the iPhoneIPhone
The iPhone is a line of Internet and multimedia-enabled smartphones marketed by Apple Inc. The first iPhone was unveiled by Steve Jobs, then CEO of Apple, on January 9, 2007, and released on June 29, 2007...
on June 29, 2007, it was sold exclusively with AT&T (formerly Cingular) contracts in the United States. To enforce this exclusivity, Apple employed a type of software "lock" that ensured the phone would not work on any network besides AT&T's. Related to the concept of bricking, any user who tried to unlock or otherwise tamper with the locking software ran the risk of rendering their iPhone permanently inoperable.
This caused complaints among many consumers, as they were forced to pay an additional early termination fee of $175 if they wanted to unlock the device safely for use on a different carrier.
Other companies such as Google
Google
Google Inc. is an American multinational public corporation invested in Internet search, cloud computing, and advertising technologies. Google hosts and develops a number of Internet-based services and products, and generates profit primarily from advertising through its AdWords program...
complained that tying encourages a more closed access based wireless service. Many questioned the legality of the arrangement, and in October 2007 a class-action lawsuit was filed against Apple, claiming that its exclusive agreement with AT&T violates California antitrust law. The suit was filed by the Law Office of Damian R. Fernandez on behalf of California resident Timothy P. Smith, and ultimately sought to have an injunction issued against Apple to prevent it from selling iPhones with any kind of software lock.
In July 2010, federal regulators clarified the issue when they determined it was lawful to hack (or in other terms, "jail break") the iPhone, declaring that there was no basis for copyright law to assist Apple in protecting its restrictive business model.
Jail breaking is a common term used to describe a situation in which a person hacks into the operating system
Operating system
An operating system is a set of programs that manage computer hardware resources and provide common services for application software. The operating system is the most important type of system software in a computer system...
of an iPhone (or other device) in an attempt to unlock it. If done successfully, this would allow the hacker to run any application on the phone they choose, including applications not authorized by Apple. Apple told regulators that modifying the iPhone operating system leads to the creation of an infringing derivative work
Derivative work
In United States copyright law, a derivative work is an expressive creation that includes major, copyright-protected elements of an original, previously created first work .-Definition:...
that is protected by copyright law. This means that the license on the operating system forbids software modification. Regulators agreed that the activity of an iPhone owner who modifies his or her iPhone's firmware/operating system in order to enable it to run an application that Apple has not approved, but that the iPhone owner wishes to run on the iPhone, fits comfortably within the four corners of fair use
Fair use
Fair use is a limitation and exception to the exclusive right granted by copyright law to the author of a creative work. In United States copyright law, fair use is a doctrine that permits limited use of copyrighted material without acquiring permission from the rights holders...
.
Tying of Microsoft products
Another prominent case involving a tying claim (among many others) was United States v. MicrosoftUnited States v. Microsoft
United States v. Microsoft was a set of civil actions filed against Microsoft Corporation pursuant to the Sherman Antitrust Act of 1890 Section 1 and 2 on May 8, 1998 by the United States Department of Justice and 20 U.S. states. Joel I. Klein was the lead prosecutor...
. By some accounts, Microsoft
Microsoft
Microsoft Corporation is an American public multinational corporation headquartered in Redmond, Washington, USA that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions...
ties together Microsoft Windows
Microsoft Windows
Microsoft Windows is a series of operating systems produced by Microsoft.Microsoft introduced an operating environment named Windows on November 20, 1985 as an add-on to MS-DOS in response to the growing interest in graphical user interfaces . Microsoft Windows came to dominate the world's personal...
, Internet Explorer
Internet Explorer
Windows Internet Explorer is a series of graphical web browsers developed by Microsoft and included as part of the Microsoft Windows line of operating systems, starting in 1995. It was first released as part of the add-on package Plus! for Windows 95 that year...
, Windows Media Player
Windows Media Player
Windows Media Player is a media player and media library application developed by Microsoft that is used for playing audio, video and viewing images on personal computers running the Microsoft Windows operating system, as well as on Pocket PC and Windows Mobile-based devices...
, Outlook Express
Outlook Express
Outlook Express is an email and news client that is included with Internet Explorer versions 4.0 through 6.0. As such, it is also bundled with several versions of Microsoft Windows, from Windows 98 to Windows Server 2003, and is available for Windows 3.x, Windows NT 3.51, Windows 95 and Mac OS 9...
and Microsoft Office
Microsoft Office
Microsoft Office is a non-free commercial office suite of inter-related desktop applications, servers and services for the Microsoft Windows and Mac OS X operating systems, introduced by Microsoft in August 1, 1989. Initially a marketing term for a bundled set of applications, the first version of...
. The United States claimed that the bundling of Internet Explorer (IE) to sales of Windows 98
Windows 98
Windows 98 is a graphical operating system by Microsoft. It is the second major release in the Windows 9x line of operating systems. It was released to manufacturing on 15 May 1998 and to retail on 25 June 1998. Windows 98 is the successor to Windows 95. Like its predecessor, it is a hybrid...
, 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
Web browser
A web browser is a software application for retrieving, presenting, and traversing information resources on the World Wide Web. An information resource is identified by a Uniform Resource Identifier and may be a web page, image, video, or other piece of content...
and a mail reader are simply part of an operating system
Operating system
An operating system is a set of programs that manage computer hardware resources and provide common services for application software. The operating system is the most important type of system software in a computer system...
, included with other personal computer
Personal computer
A personal computer is any general-purpose computer whose size, capabilities, and original sales price make it useful for individuals, and which is intended to be operated directly by an end-user with no intervening computer operator...
operating systems, and the integration of the products was technologically justified. Just as the definition of a car
Čar
Čar is a village in the municipality of Bujanovac, Serbia. According to the 2002 census, the town has a population of 296 people.-References:...
has changed to include things that used to be separate products, such as speedometer
Speedometer
A speedometer is a gauge that measures and displays the instantaneous speed of a land vehicle. Now universally fitted to motor vehicles, they started to be available as options in the 1900s, and as standard equipment from about 1910 onwards. Speedometers for other vehicles have specific names...
s 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
United States Court of Appeals for the District of Columbia Circuit
The United States Court of Appeals for the District of Columbia Circuit known informally as the D.C. Circuit, is the federal appellate court for the U.S. District Court for the District of Columbia. Appeals from the D.C. Circuit, as with all the U.S. Courts of Appeals, are heard on a...
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
Rule of reason
The Rule of Reason is a doctrine developed by the United States Supreme Court in its interpretation of the Sherman Antitrust Act. The rule, stated and applied in the case of Standard Oil Co. of New Jersey v. United States, 221 U.S...
. 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
State Attorney General
The state attorney general in each of the 50 U.S. states and territories is the chief legal advisor to the state government and the state's chief law enforcement officer. In some states, the attorney general serves as the head of a state department of justice, with responsibilities similar to those...
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
Novell
Novell, Inc. is a multinational software and services company. It is a wholly owned subsidiary of The Attachmate Group. It specializes in network operating systems, such as Novell NetWare; systems management solutions, such as Novell ZENworks; and collaboration solutions, such as Novell Groupwise...
where they alleged that manufacterers of computers ("OEM
OEM
OEM means the original manufacturer of a component for a product, which may be resold by another company.OEM may also refer to:-Computing:* OEM font, or OEM-US, the original character set of the IBM PC, circa 1981...
s") were charged less for their Windows bulk purchases if they agreed to bundle Office with every PC sold than if they gave computer purchasers the choice whether or not to buy Office along with their machines — 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 thoughtChicago school (economics)
The Chicago school of economics describes a neoclassical school of thought within the academic community of economists, with a strong focus around the faculty of The University of Chicago, some of whom have constructed and popularized its principles...
, 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 failure
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...
s that unbridled rivalry might otherwise produce. For instance, some economists have argued that a franchiser
Franchising
Franchising is the practice of using another firm's successful business model. The word 'franchise' is of anglo-French derivation - from franc- meaning free, and is used both as a noun and as a verb....
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
Trademark
A trademark, trade mark, or trade-mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products or...
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
Rule of reason
The Rule of Reason is a doctrine developed by the United States Supreme Court in its interpretation of the Sherman Antitrust Act. The rule, stated and applied in the case of Standard Oil Co. of New Jersey v. United States, 221 U.S...
.
See also
- Complementary good
- IunctimIunctimThe Latin word iunctim denotes the process of connecting two or more independent agreements according to the principle of one agreement will not be made unless all others are....
- Loss leaderLoss leaderA loss leader or leader is a product sold at a low price to stimulate other profitable sales. It is a kind of sales promotion, in other words marketing concentrating on a pricing strategy. A loss leader is often a popular article...
- Product bundlingProduct bundlingProduct bundling is a marketing strategy that involves offering several products for sale as one combined product. This strategy is very common in the software business , in the cable television industry Product bundling is a marketing strategy that involves offering several products for sale as...
- Product churningProduct churningProduct churning is the business practice whereby more of the product is sold than is beneficial to the consumer. An example is a stock broker who buys and sells securities in a portfolio more frequently than is necessary in order to generate commission fees....
- Vendor lock-inVendor lock-inIn economics, vendor lock-in, also known as proprietary lock-in or customer lock-in, makes a customer dependent on a vendor for products and services, unable to use another vendor without substantial switching costs...
- Digital restrictions management
- Tying of the iPhone to AT&TTying of the iPhone to AT&TWhen Apple initially released the iPhone on June 29, 2007, it was sold exclusively with AT&T contracts in the United States. The tying arrangement between Apple's smartphone and a specific service provider caused some controversy, bringing the concepts of jailbreaking and bricking into the...