Tying

Definition

Tying refers to the practice of a company with market power requiring customers to purchase one product or service (the tying product) as a condition of obtaining another product or service (the tied product). This is considered an anticompetitive behavior that can limit consumer choice and stifle competition in the market.

5 Must Know Facts For Your Next Test

1. Tying can be used by a dominant firm to extend its market power from one product to another, potentially harming competition and consumer welfare.
2. Tying arrangements may be prohibited under antitrust laws if the tying product has sufficient market power and the arrangement affects a substantial volume of commerce in the tied product market.
3. Procompetitive justifications for tying, such as ensuring product quality or providing cost savings to consumers, may be considered by courts when evaluating the legality of a tying arrangement.
4. The degree of market power in the tying product and the foreclosure of competition in the tied product market are key factors in determining the anticompetitive effects of tying.
5. Regulators and courts often scrutinize tying practices to ensure they do not unduly restrict consumer choice or create barriers to entry for competitors in the tied product market.

Review Questions

• Explain how tying can be used as an anticompetitive practice by a dominant firm.
  • Tying allows a dominant firm with market power in one product to leverage that power into another, related product market. By requiring customers to purchase the tied product as a condition of obtaining the tying product, the firm can foreclose competition in the tied product market and limit consumer choice. This can harm competition by making it difficult for rival firms to compete effectively in the tied product market, as customers are forced to purchase the dominant firm's tied product even if they would prefer an alternative.
• Describe the key factors that courts and regulators consider when evaluating the legality of a tying arrangement.
  • When assessing the legality of a tying arrangement, courts and regulators will typically examine the degree of market power the firm has in the tying product market, as well as the foreclosure of competition in the tied product market. They will also consider any potential procompetitive justifications for the tying, such as ensuring product quality or providing cost savings to consumers. The overall impact on consumer welfare and competition in the affected markets is a critical factor in determining whether the tying arrangement is anticompetitive and, therefore, unlawful.
• Analyze how tying can create barriers to entry for competitors in the tied product market and discuss the potential consequences for consumers.
  • By tying the sale of one product to another, a dominant firm can effectively exclude competitors from the tied product market. This foreclosure of competition can create significant barriers to entry, making it difficult for rival firms to gain a foothold and challenge the dominant firm's position. The lack of competition in the tied product market can then lead to higher prices, reduced innovation, and fewer choices for consumers. This can ultimately harm consumer welfare, as consumers are forced to purchase the dominant firm's tied product even if they would prefer an alternative. Regulators and courts closely scrutinize tying arrangements to ensure they do not unduly restrict competition and consumer choice.

Related terms

Bundling:

The practice of selling two or more distinct products or services as a single combined package, which can be a form of tying.

Leverage:

The ability of a company with market power in one product market to use that power to gain an advantage in another, related product market through tying.

Foreclosure: The exclusion of competitors from the tied product market due to the tying arrangement, which can reduce competition and consumer choice.