Tying

Definition

Tying is a sales practice where a seller conditions the sale of one product or service (the “tying” product) on the purchase of another separate product or service (the “tied” product).

Key Characteristics

1. Conditional Sale

• The purchase of one product is contingent on buying another
• Often involves a desirable product tied to a less desirable one

2. Market Power

• Usually practiced by companies with significant market power in the tying product
• Leverages dominance in one market to gain advantage in another

3. Separate Products

• The tying and tied products are distinct
• Could theoretically be sold separately

Legal and Economic Implications

1. Antitrust Concerns

• Often viewed as anti-competitive behavior
• May violate antitrust laws in many jurisdictions

2. Market Distortion

• Can artificially increase market share for the tied product
• May prevent fair competition in the tied product’s market

3. Consumer Impact

• Can limit consumer choice
• Potentially forces consumers to buy unwanted products

Types of Tying Arrangements

1. Contractual Tying
   • Explicitly stated in sales agreements
   • Example: Software bundled with specific hardware
2. Technological Tying
   • Products designed to work only with specific complementary products
   • Example: Proprietary printer cartridges
3. Economic Tying
   • Pricing structures that make separate purchases uneconomical
   • Example: Significant discounts for bundled purchases

Examples in Finance and Business

1. Banking Services
   • Requiring a checking account to get a loan
2. Software Licensing
   • Bundling multiple software products in one license
3. Telecommunications
   • Bundling internet, phone, and TV services
4. Franchising
   • Requiring franchisees to purchase supplies from the franchisor

Legal Status

1. United States

• Generally illegal under the Sherman Antitrust Act
• Subject to rule of reason analysis in some cases

2. European Union

• Prohibited under Article 101 of the TFEU
• Can be exempted if it provides economic benefits

3. Exceptions

• Some tying arrangements may be allowed if they benefit consumers or promote efficiency

Economic Arguments

For Tying:

• Can lead to economies of scale
• May reduce transaction costs for consumers
• Can ensure quality control in some cases

Against Tying:

• Reduces consumer choice
• Can lead to higher prices
• May stifle innovation in tied product markets

Detection and Enforcement

1. Regulatory Scrutiny
   • Monitored by antitrust authorities
   • Often investigated following complaints
2. Legal Challenges
   • Can result in lawsuits from competitors or consumers
   • Potential for significant fines and forced unbundling
3. Market Analysis
   • Economists analyze market impacts
   • Assessment of market power and consumer harm

Related Concepts

1. Bundling
2. Exclusive dealing
3. Market foreclosure
4. Vertical integration
5. Product compatibility