Tuesday, March 20, 2012

Hogtied in Hoboken

Tying contracts were at the heart of the 1998 FTC suit against Microsoft. Presumably, by including a copy of Internet Explorer with Microsoft's OS, competitors would be crowded out of the market. I won't comment on the prescience of the Justice Department (as astute readers will surely be able to handle that task on their own) but I will comment that the presumptive logic behind this part of antitrust legislation is deeply rooted in Euvoluntary Exchange.

The idea is something like this: consumers want product X and are willing to pay a fair price for it. Producers also want to sell product Y, but they can't move it because it's naff. So instead of selling products X and Y separately at their respective prices, they sell X and Y together, coercing consumers (by circumstance, mind you) to accept a product (product Y) they otherwise wouldn't have done at too high a price. Producers can get away with this only when they have sufficient "market power" (in other words, the BATNA to buying their product is quite unattractive indeed). That seems to be the rough-and-dirty of the theory. In practice, the Sherman and Clayton Acts are often used as special-interest bludgeons that punish successful (read: good at serving the customer) firms, particularly foreign-held entities (like Alcan).

For some of our younger readers, there used to be a time when music was purchased in small bundles, called variously at times LPs, cassettes, 8-tracks or CDs. Other formats existed, but the notion of buying one song at a time was fairly rare. Sure, there were 45 rpm records with two or three songs pressed on them, but for the most part, folks bought the entire long format album (imagine Sony's despair if they had to make a Walkman using a 45). Isn't this a tying contract? In order to get "Here Comes the Sun", you also had to buy a copy of "Octopus's Garden". Why did nobody ever take Ringo to court? You could say that The Beatles (or their record label) had plenty of market power.

Antitrust as she is writ is meant to ensure distributive fairness. Antitrust as she is practiced stifles the vigor of innovation. Its discretion and caprice mark what Robert Higgs calls regime uncertainty. Approach with caution.

1 comment:

  1. I've never been convinced that the cost of switching to another browser was high after Google.

    Hardware sellers often bundle nuts and bolts with washers. The price is higher than bolts alone, because my demand is comparatively elastic toward the bundle. But, if I don't need all the washers, I just throw them away.

    I think IE is closer to the hardware example than say, forcing me to purchase a service contract when I buy a machine, or all that boxart that comes with DVDs. :P

    I'd suspect sustainable tie-ins only occur when there are high complementarities between the bundled goods. If not, the producer could probably extract more profit by selling separately, since demand would be less elastic with such a bundle than with nuts, bolts, and washers.

    All of which does nothing to 'suade me from the opinion that for producers, even monopolists, pursuing their own interests is largely commensurable with the interests of their customers.

    There's a reason you can purchase monitors separately from computers now.


Do you have suggestions on where we could find more examples of this phenomenon?