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

Published date01 June 1991
Date01 June 1991
DOIhttp://doi.org/10.1177/0003603X9103600206
Subject MatterArticle
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).

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