Tying meets the new institutional economics: farewell to the chimera of forcing.

Author:Meese, Alan J.

Tying contracts--agreements conditioning the sale of one, "tying" product upon an agreement to purchase a second, "tied" product--are endemic in the modern economy.(1) Firms that sell copying machines often seek to require their customers to purchase from them service or paper.(2) Automobile makers condition the sale of cars upon agreements by dealers or customers to purchase spare parts or optional equipment exclusively from the manufacturer.(3) Computer companies require purchasers to buy software or peripheral equipment,(4) and software firms require purchasers to buy hardware as well.(5) Examples could be multiplied without end.

Tying contracts are not a modern phenomenon; each of the examples just mentioned has parallels at least sixty years old.(6) Despite the ubiquity and long tradition of such contracts, however, the Supreme Court has never settled upon a coherent approach to distinguish benign ties from those that are harmful. Instead, almost since the enactment of the Sherman Act, the Court has swung from one extreme to another.(7) Initially holding that all such agreements are legal,(8) the Court soon reversed course, suggesting that any tie that foreclosed a significant amount of commerce in the tied product was unlawful.(9) About three decades later, however, the Court appeared to limit this rule to ties imposed by monopolists,(10) only to change its mind again just five years later, when it held that any tying agreement obtained by a firm with only the slightest market power is "per se" unlawful.(11)

More recently, the Court has reached a sort of middle ground between some of the more extreme approaches it has taken in the past. Although purporting to retain the per se rule against ties, the Court has added new conditions to its invocation, the most important of which is the requirement that the plaintiff prove that the seller possesses market power over the tying product of the sort necessary for liability in other antitrust contexts.(12) In maintaining this middle position, however, the Court has failed to articulate any coherent theory governing the antitrust treatment of ties.(13) It has not, for instance, provided a principled explanation for its conclusion that tying contracts meeting the requirements for per se condemnation are "in restraint of trade."(14) Moreover, the Court has fastidiously avoided the question of whether defendants can "justify," by way of an affirmative defense, otherwise per se illegal ties.(15) Finally, the Court has failed to articulate a complete framework for analyzing ties that do not merit per se treatment.(16) Lower courts, then, are left to grapple with such issues themselves and, not surprisingly, reach divergent conclusions.(17)

Despite the incoherence of the Court's position, the current equilibrium appears to be a stable one. Although the Court has responded to calls to relax per se rules in other contexts,(18) it has expressly rejected the call to jettison the per se rule where ties are concerned,(19) and applied the rule in its most recent decision on the subject.(20) Given the Current membership of the Court and the doctrine of stare decisis, one would expect the Justices to continue to occupy this middle ground.(21)

The oscillation that has led to the equilibrium reflected in Modern tying doctrine is understandable, at least in part. Over the years, the Court has been presented with two radically different paradigms for evaluating tying contracts, paradigms that have appeared in briefs, articles, books, and lower court opinions. Under the long-standing "Traditional" approach, all such agreements would be deemed illegal per se, except, perhaps, in those few instances in which the seller could prove that the tie is absolutely necessary to achieve a legitimate objective that outweighs the harm it produces.(22) Under the second approach, advanced by the so-called Chicago School of antitrust analysis,(23) courts would either declare all tying contracts legal or, at the most, subject them to scrutiny under the Rule of Reason.(24) Because the version of the Rule of Reason advocated by Chicagoans is so demanding, requiring a party who challenges a tie to prove that the seller possesses market power in both the tying and tied product markets,(25) there would be little practical difference between such "scrutiny" and a rule of absolute legality.(26)

Although the battle between these two camps has been raging for over three decades now, there is no indication that either side will persuade the other to change its position. This gridlock should surprise no one. After all, Chicagoans and Traditionalists, as well as their judicial counterparts, approach antitrust questions from radically different premises. To Chicagoans, for instance, "consumer welfare"--usually defined as "allocative efficiency"--is the only objective of the antitrust laws, and thus the sole normative criterion for evaluating trade restraints.(27) Under this approach, a trade restraint or merger is deemed reasonable so long as its benefits outweigh its costs, even if it results in higher prices for consumers.(28) To Traditionalists, by contrast, antitrust laws promote a whole host of values, economic, social, and political, that cannot be encapsulated in an economic rubric such as "allocative efficiency" or "consumer welfare," however defined.(29)

Moreover, even if the debate is confined to economic values, Traditionalists are quick to point out that the static allocative efficiency standard employed by Chicago is not the only metric for gauging the economic consequences of a practice.(30) Furthermore, unlike Chicagoans, Traditionalists approach non-standard Contracts such as ties "inhospitably," and thus are more likely to conclude that such agreements are anticompetitive, even when judged under the allocative efficiency standard applied by the Chicago School.(31) Finally, Traditionalists are more likely to see economic value in the competitive process itself, even where Static models might suggest that a practice will not result in competitive harm.(32) Two arguments that begin from

such different premises, it seems, cannot "end up" in the same place.(33)

The gridlock that currently characterizes the debate and resulting jurisprudence about ties is not, in fact, inevitable. Instead, that gridlock stems from the Chicago School's insistence that a static, price-theoretic model is the sole lens through which to evaluate the economic origins and consequences of tying arrangements.(34) The application of this model to the real world, characterized as it is by product differentiation and transaction costs, seems to confirm the Traditionalists' assumption that all tying contracts--even those that Chicagoans deem beneficial--are the result of "forcing," that is, the use of market power to coerce their acceptance.

Indeed, although Chicagoans seem implicitly to take issue with the Traditionalist assumption that all ties are the result of forcing, they concede, in fact, assert, that most such contracts are the result of economic coercion. This general agreement with Traditionalist assumptions about the origin of such contracts leaves the proper antitrust treatment of ties highly dependent upon purely normative premises about the ultimate goals of the antitrust laws. More precisely, once it is conceded that such contracts are usually the result of forcing, Chicago's favorable attitude toward them depends upon an indifference to the presence of such coercion, as well as the assumption that allocative-efficiency is the sole criterion for evaluating trade restraints generally. Because Traditionalists are unwilling to abandon their normative hostility toward both coercion and the allocative-efficiency standard, any attempt by Chicagoans to convince them to renounce their support for a per se rule is destined to fail. Moreover, although the Supreme Court, like Chicagoans, has rejected the Traditionalist assumption that all ties are imposed by market power, it has also rejected Chicago's normative premises in this context several times. As a result, it is highly unlikely, particularly in light of the doctrine of stare decisis, that Chicagoans will be able to convince the Justices to jettison the Modern version of the per se rule.

The Chicago approach, however, does not supply the only alternative to that adopted by the Traditionalists. The "New Institutional Economics" ("NIE"), which explicitly incorporates transaction costs and product differentiation into its mode of analysis, provides a far more robust account of the economic origins of tying contracts than either the Chicago or the Traditional approach.(35) Specifically, the NIE suggests that a significant proportion of tying contracts are a form of voluntary partial integration designed to overcome various types of market failure that result from high transaction costs and the complementarity between tied and tying products. Moreover, far from involving the coercive forcing that Traditionalists attribute to these contracts, and about which Chicagoans are indifferent, such integration can occur through a process of contract formation that does not involve any exercise of market power.

Of course, the mere fact that the NIE provides the most complete account of the economic origins of tying contracts does not, ipso facto, require the abandonment of the Traditional approach or a change in Modern doctrine. It is conceivable, for instance, that the normative premises on which Traditionalists rely still require hostility towards ties even in the face of the new learning. Moreover, it seems possible that considerations of stare decisis compel the Supreme Court to adhere to its current middle ground, even if the NIE explains the origin of tying contracts more completely than previous accounts did. In short, the NIE might be a boon to economists, but less useful for lawyers and judges working with a statute passed in 1890 and interpreted countless...

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