Excluding Competition without Monopoly Power: The Use of Tying Arrangements to Exploit Market Failure

• Author: W. David Slawson
• Published date: 01 June 1991
• Date: 01 June 1991
• DOI: http://doi.org/10.1177/0003603X9103600206
• Subject Matter: Article

The Antitrust Bulletin/Summer

1991

Excluding competition without

monopoly power: the use

of

tying arrangements

to exploit market failure

BY W. DAVID SLAWSON*

I. Introduction

457

A tying arrangement (or

"tie-in,"

for short) is a sale or lease

of

a

product on the condition that the buyer also buy or lease a

different product from the same seller. The first product is called

the "tying

product,"

the second, the

"tied."

Tie-ins were strictly

forbidden by the decisions

of

the United States Supreme Court

from the middle thirties to the middle seventies, after which the

Court weakened the prohibition in two successive decisions. Since

then, although tie-ins are still illegal in theory, they are legal in

practice, because the obstacles the Court has erected in the way

of

proving illegality are practically insurmountable. In a parallel but

Torrey H. Webb Professor of Law, University of Southern

California.

AUTHOR'S NOTE: I wish to acknowledge the valuable comments and

criticisms

of

my

colleague. Richard

Craswell.

©1991by Fed... al Lcgal Publications, Inc.

458 : The antitrust bulletin

not unrelated development, the Department of Justice changed its

guidelines for tie-ins to say that they are generally procompeti-

tive, and both it and the Federal Trade Commission stopped

prosecuting them.

It is impossible to say whether these developments reflect the

consensus

of

the antitrust community. Their immediate causes

were the actions of the few individuals who set government

antitrust policy under the Reagan administration. These few

individuals changed the Department

of

Justice guidelines, they

ordered the cessation

of

prosecution

of

tie-ins, and, as I will

explain later, they submitted an amicus brief on the side

of

the

defendant, which succeeded in persuading the Court

to

make the

changes in the law that effectively legitimized tie-ins. On the other

hand, these few individuals could not have done what they did if

their opinions had not had widespread support in the antitrust

community.

The support consists largely

of

agreement on two economic

conclusions. One is that except under rare circumstances tie-ins

are procompetitive. The argument leading to this conclusion is

short and simple. Since the buyer will not give up his freedom to

buy the tied product elsewhere for nothing, the tying seller must

reduce the price

of

the tying product. All any other seller of the

tied product need do in order to persuade the buyer

to

buy from

him instead, therefore, is reduce his prices enough

to

save the

buyer more on the tied product than the tying seller would save

him on the tying product. Thus, tie-ins increase competition.

They require the tying seller

to

decrease his price

of

the tying

product, and they encourage other sellers to decrease their prices

of

the tied product.

Although this conclusion, if correct, would have been reason

enough to eliminate the legal prohibition

of

tie-ins, it gained

support from a second conclusion. The antitrust community also

came to believe that a seller could not make a tie-in unless he had

monopoly power in the market for the tying product, or at least

that a tie-in could not harm competition if the seller lacked that

monopoly power. Without it, supposedly, he would be unable to

Tying arrangements :459

force buyers also to take the tied product, and unless buyers were

forced, the argument was, there could be no harm to competi-

tion. This conclusion supported the first by making it seem that

there was no need to worry about tie-ins where competition was

vigorous-even

if one still believed they were generally harmful

to competition.

The makers of government antitrust policy under the Reagan

administration were not content to rely on these conclusions to

persuade the Court to effectively eliminate the tie-in rule, how-

ever. The brief the government filed in order to persuade the

Court characterized the previous tie-in rule as an absolute one,

allowing no defenses. This supposed fact

put

intense pressure on

the Court to narrow the rule's application, in order

to

avoid

condemning conduct that was competitively harmless or benefi-

cial. In fact, the tie-in rule, like most antitrust rules, has always

been a creature of the Court's own decisions, and the Court has

at least entertained a defense, and sometimes granted it, in every

tie-in case it has ever decided, going back to the 1920's.

I

will

disprove both

of

these economic conclusions. Tie-ins do

as a rule harm competition. A seller does

not

need monopoly

power in the market for the tying product in order to make a tie-

in or for the tie-in to harm competition. The exceptions to the

rule

of

harming competition are better handled by allowing

defenses

than

by narrowing the rule, because narrowing the rule

allows competitively harmful conduct to escape the rule's prohi-

bition.

If

the Court restores the per se rule to its former breadth,

therefore, it should also make clear

that

it allows defenses.

II. The effective legalization of tie-ins

Tying arrangements were made illegal under the federal anti-

trust laws in 1914 by the enactment

of

the Clayton Antitrust Act.'

The Supreme Court first condemned a tying arrangement on

38 Stat. 730 (1914), codified as amended, 15 U.S.C.A. §§ 12-27

(1989).