Per se tying: Why no simple “relative size of markets” test?
Modern tying law is concerned with foreclosure in the tied product market, not customer exploitation in the tying product market. As a result, we require market power in the tying product market, because without market power, there’s nothing to be leveraged into the tied product market. But doesn’t the same logic suggest a requirement that the tying product market be at least 30% of the size of the tied product market? (Assuming, for convenience’s sake, that foreclosure of less than 30% is unlikely to significantly distort the competitive process.) Or put differently: If the tying market is less than 30% of the size of the tied market, then there’s no (per se) tying concern, irrespective of the defendant’s market power in the tying market. Because even if the defendant had 100% of the tying product market, and it imposed an airtight tie on its customers, it could foreclose no more than 30% of the customers in the (larger) tied product market. The chart below illustrates the concept.
In this example, A is a monopolist seller of a specialized lab tool that uses CD-ROMs. A requires its customers to buy standard CD-ROMs only from A, i.e., imposes a tie (e.g., for metering purposes). Some CD-ROM sales from B, D, and E to customer C will thus be foreclosed. But even if A has market power in the tying product market, the tie won’t make a dent in the huge, competitive market for CD-ROMs. Am I missing something?
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December 9th, 2007 at 9:59 pm
But what if A says, I’ll sell you my monopoly lab tool only if you also buy my CD-ROMs. How do all the C’s get the tool, and still buy from B, D & E.
December 10th, 2007 at 12:35 pm
They don’t! Those who want the tool must buy the CD-ROMs (for use with the tool) from A. Their business will be lost to B, D, and E. My point is not that no foreclosure occurs in the tied product market for CD-ROMs, but that because of the relatively small size of the entire tying product market compared to the tied market, the degree of foreclosure in the tied market cannot exceed a threshold of concern no matter how complete A’s monopoly is in the tying market. (One might argue whether a 30% threshold is too high or too low, but there surely must be some threshold in the tying product market below which we should no longer care about foreclosure.)
December 13th, 2007 at 2:55 pm
A is actually using the tie to insulate sales of cd’s to his installed base of users of the tool. By appropriately choosing the price of the tool and of the cd’s - given perfect tying - firm A can price discriminate users of the tool depending on their usage habits.
December 26th, 2007 at 11:41 pm
One of requirements for tying to be illegal per se is that the (tying) arrangement must affect a “substantial volume of commerce in the tied market.” See, e.g., Fortner Enters, Inc., v. United States Steel Corp., 394 U.S. 495, 503 (1969). The example noted above would not be a problem in the court because it would fail to satisfy this requirement. In other words, your example seems to satisfy other requirements, i.e., (1) monopoly power in the tying market (2) tying arrangement (3) two distinctive products, but failed to meet the fourth requirement noted in the first sentence. I don’t think that we need to compute the “relative” market share of the tying product. If calculation is really necessary, I agree with you in that at least 30% of market share in the tying product market should be possessed to affect a “substantial volume of commerce in the tied market.” If I don’t understand your point precisely, correct me, please. Thank you.