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B. Underlying economic principles
The economic literature is ambiguous regarding the effects of tying and bundling. One of the main characteristics of a monopoly is the ability of one firm to raise prices above marginal cost level. Economic literature is questioning whether effects of tying and bundling can be transferred to other markets or not.
Tying and bundling have positive and negative effects.
Both strategies include the transfer of market power from a market with dominant position to secondary market where a company does not hold a dominant position. Given two markets, market A is a monopolistic market for one product – market B is a competitive market for a complementary product. The monopolistic company bundles its product from market A with a product of market B. Resulting negative effects of this strategy are:
competition constraints;
the reduction of demand for other goods supplied by competitors and
possible market foreclosure.
But also positive effects like efficiency gains due to reduction or solving of information and transaction problems and increased supply of varied products are possible.From a competition point of view it has to be analyzed whether tying or bundling strategies for certain products may be used to leverage market power to another market and harm competition and maximize profits for monopolistic companies. In economic literature, there are two contrary argumentation lines.
Followers of Chicago School disagree with the possible results of the leverage effect (R.A. Posner: Antitrust Law: An Economic Perspective, 1976 et al.). Their main argument is that monopoly profits can only be realized in one market and monopoly power itself not transferred to another market. Overall profits will not exceed the overall monopolist profits of one market and, therefore, companies which tie and bundle products have no incentive to tie and bundle but for efficiency reasons.This argument of the Chicago School is based on strict assumptions (monopolist is able to capture the entire willingness to pay of consumers, goods are consumed in fixed proportions, perfect competition in secondary market) which are not applicable for most existing markets.On the other hand, followers of the more recent Industrial Organization Theory argue that leverage effects are possible and might – under certain conditions – even lead to market foreclosure. Whinston shows that in imperfect markets product bundling is useful, if the monopolistic company fails a perfect price discrimination of the consumers in the monopolistic market. The monopolistic company may transfer its market power from the monopolistic market to the secondary competitive market of the bundled product and raise prices. As Whinston points out, the company is able to raise its overall profits at the cost of a decreased overall welfare and to squeeze competitors via an aggressive pricing strategy out of the secondary market.Bundling deters potential competitors from entering the market because potential competitors would have to enter the monopolistic market first and afterwards the competitive secondary market as well. As a result, bundling might lead to a market foreclosure and high barriers to entry.
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Modern economic literature rejects a per se legality or illegality approach of certain bundling or tying strategies. Instead a rule of reason approach with balancing of positive efficiency effects and negative anticompetitive effects is favoured.
C. Legal conditions and parameters
For tying and bundling to be considered abusive, from the case-law, the Discussion Paper
and the Commission’s Guidance we can conclude that for tying or bundling to be abusive, the following conditions must be fulfilled:
the tying and tied products are distinct products;
the tying practice is likely to lead to anti-competitive foreclosure;
there is no objective justification for the tying or bundling.
In its Microsoft decision, the Commission also added lack of customer choice/coercion as a condition.
This can arise from the unavailability of the products separately, from pressure exerted on the customers through the promise of favorable treatment, or from pricing incentives which may be so powerful as to convince any customer to buy the bundle instead of separate products.
However, in the Commission’s guidance released after the Microsoft case well as in previous case-law, no mention of such a requirement is ever made. Logically, such coercion or lack of choice may be seen instrumental in the foreclosure effect that tying and/or bundling create.
I. Dominance
The first condition for exclusionary effects to arise requires dominance in the tying market. It is not necessary that the company also is dominant in the tied market. However, dominance also in the tied market renders the finding of an abuse more likely. In order to assess this properly it is normally necessary to define the relevant market(s) on which both the tying and the tied product are sold.
