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I. General

In general, tying and bundling refer to sales strategies where firms offer a combination of distinctive products.If employed by a dominant firm, such sales strategies may be regarded abusive and prohibited under Art 102 of the TFEU. Tying and bundling have common elements and they are associated with the same competition concerns (in particular, leverage of market power and market foreclosure) but they are understood to be to two different sales strategies.

Tying is explicitly mentioned in Art 102 of the TFEU as an abusive conduct. According to Art 102(d) abuse may in particular consist in “conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.” This describes the nature of tying, i.e. the practice of supplying something on the condition that the customer purchases something else from the supplier as well.Even though bundling is not explicitly mentioned in Art 102 of the TFEU it is an established notion in EU competition law. Tying has been discussed e.g. in the case Hilti:Hilti was a supplier of a nail gun protected by a patent. Hilti did not have any patent on the nails used in the nail gun and there were independent manufacturers who produced Hilti-compatible nails. According to the independent manufacturers Hilti employed several selling practices which required the customers who bought the Hilti nail gun to purchase also nails from Hilti and these selling practices excluded other manufacturers from the nail market. The ECJ ruled that Hilti infringed Art 102 of the TFEU (then Art 82) because the selling practices that tied the Hilti nail gun to the “Hilti nails” limited the entry of the independent manufacturers of Hilti-compatible nails into the market.

It is important to bear in mind that not every case where two or more products are sold together constitutes an abusive conduct under Art 102(d) of the TFEU. Tying and bundling are in fact common business practices and they are routinely engaged in by both dominant and non-dominant firms. 

For instance, selling shoes together with shoelaces or a car with tyres as one product can be regarded as a normal selling practice that merely serves the needs and preferences of the consumers. Furthermore, tying and bundling of two or more components into one product is a fundamental part of several economic activities and they can lead to substantial savings in production, distribution and transaction costs as well as to quality improvements.This can in turn be reflected in the prices for which the products are offered for sale and in the more attractive products made available for the consumers. Other justified reasons for tying and bundling products together may be e.g. ensuring the optimal production performance, maintaining the supplier´s reputation or ensuring safety of the product.However, it can be noted on the basis of case law that the ECJ and the Commission have not always accepted product safety as a proper justification for tying and bundling.

II. Tying

As already mentioned, tying refers to a sales strategy where distinctive products are offered for sale as a combination. According to the Commission, tying occurs when a dominant firm makes the sale of one product (the tying product) conditional upon the purchase of another distinct product (the tied product) from the dominant firm or someone designated by it. In such a case only the tied product could be bought separately by the customers.The tying effect deprives the customers of choice of alternative products and it can take place on technical or contractual basis.Thus contractual tying refers to situations where the customers who purchase the tying product undertake also to purchase the tied product (and not the alternatives offered by competitors). Respectively, technical tying refers to situations where the tying product is designed in such a way that it only works properly with the tied product (and not with the alternatives offered by competitors). In such cases the tied product is typically physically integrated in the tying product. Alternatively, the customers can be deprived of choice of alternative products in less direct ways. The dominant firm may e.g. impose selling conditions under which it refuses to acknowledge guarantees unless the customers use the firm´s components, consumables or services.

III. Bundling

Bundling refers to the way products are offered and priced by a dominant firm.

According to the Commission, bundling occurs on where a package of two or more goods is offered for sale.A distinction between two different types of bundling can be made: Pure bundling refers to cases, where only the bundle (i.e. products jointly) is available and not the products separately.

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. 

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:

1. the tying and tied products are distinct products;

2. the tying practice is likely to lead to anti-competitive foreclosure;

3. 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.

Concept

                “Tying” is a commercial practice whereby a supplier makes the sale of a product conditional upon the purchase of another distinct product from the same supplier. [1] The requirement for the customer to purchase both products can be on a technical basis (e.g. printers which are compatible only with certain cartridges) or contractual (e.g. when the contract between the supplier and the purchaser obliges the latter to buy the second product). “Bundling” describes a situation where two or more products are offered as a package. This practice can be “pure bundling” when the products are sold only jointly, or “mixed bundling”, where they are sold separately, but the price for the bundle is lower.

2. Positive and negative aspects

                Not all of the effects of the tying and bundling are anti-competitive. In fact, the practice is used quite often by undertakings as a tool to lower the distribution and transaction costs, to increase the savings in production, or to improve the quality. Furthermore, it allows undertaking to achieve economies of scale or to spread the risk by market entry[2].

                However, it is likely also that anticompetitive concern may rise from tying and bundling, such as foreclosure of suppliers of the product that is tied, or lack of customer choice.

3. Prohibition

                Article 102 (d) TFEU explicitly refers to the practice of tying and bundling as an example of abusive behaviour of a dominant undertaking[3].

                The European Commission established four elements in the presence of which this practice is prohibited, and the Court confirmed them in the Microsoft[4] case: (1) the tying and tied products are two separate products; (2) the undertaking concerned is dominant in the market for the tying product; (3) the undertaking concerned does not give customers a choice to obtain the tying product without the tied product; (4) the practice in question forecloses competition.

                It follows from the criteria that in first place there should be two distinct products. From a practical perspective it is important to distinguish when two products should be regarded as different. The Commission explains in the Guidance paper[5] that the distinction depends on customer demand and relies on a test which examines whether, without the tying and bundling, a substantial number of customers would still purchase the product from the same supplier. This conclusion can be based on direct empirical evidence that show that when given the choice, customers would buy the tying and tied products from different sources of supply. However, indirect evidence such as the presence on the market of undertakings specialised in the manufacture or sale of the tied product can also serve for the purpose of practical distinction between the products.

                 The second important aspect is that the supplier is offering goods or services on two different markets, whereby  it possess dominant position in the market of one of the products (the tying market) and is active, but not dominant on the market of the other product (the tied market). The aim of the undertaking is to use its dominance on the tying market in order to receive higher profits (or to enter) in the tied market, which can lead to anticompetitive foreclosure. In other word, the undertaking is leveraging its position on the tying market, which, as pointed out above, does not necessarily lead to anticompetitive effects. Only when other undertakings, competing on the tied market, are foreclosed or the competition on that market is lessened to a substantial degree, the tying and bundling will be considered as an infringement of Art. 102 TFEU. The Commission offers an effect-based approach in the assessment of the foreclosure and points out that such effect is more likely to occur in situations where the dominant firm’s strategy is lasting over long period of time, [6] when there are more products in the bundle, [7] or where there is insufficient number of customers who would buy the tied products separately. [8]  

4. Case law

4.1. Contractual tying

                One of the cases with major importance on the issue of tying of products is Hilti. [9] In this case Hilti, a producer of nail-guns, cartridges for the nail-guns (for both of which it has patents) and nails, has dominant position in the markets for all of the products. However, there are number of small, independent manufacturers of nails, compatible with the Hilti cartridges. The company undertook various contractual actions in order to tie the nails to the cartridges, e.g. reducing discounts cartridges when the nails are not ordered, making the sale of cartridges conditional on taking a complement of nails etc. The Commission found that this behaviour is anticompetitive and is preventing or limiting the entry of independent producers of nails, compatible with the Hilti cartridges into the market.[10] The decisions was upheld by the General Court and affirmed by the European Court of Justice.[11]

                Another important case is Tetra Pak II. [12]Tetra Pak was an undertaking, dominant in the markets for aseptic packaging machines and cartons and sought to increase its market position on the markets of non-aseptic machines and cartons by tying the non-aseptic packaging machines with the cartons. The Court rejected the arguments that there is a natural link between the machines and the cartons.[13] The theory of harm in this case was linked to the ability of smaller firms to compete more than to the efficiency and market structure.

4.2. Technological tying

                In 2004 the Commission issued a decision[14] against Microsoft for an abuse of dominant position by tying Windows Media Player to the operation system Windows. The detrimental effect in this particular case was found to be that the installation of the player in Windows is in fact more efficient distribution system in compare to the competitors, which could lead to “ubiquity” of the player. Second, by tying the products Microsoft induces the content providers and software developers to use the player format which detriments the technologies of the competitors. Thirdly, there were network effects arising from the practice that would result in “tipping” to the player. [15]

                In the judgement following the action of Microsoft of annulment of the decision the Court focused its reasoning on the structure of competition and founded that the balance is appreciably altered in favour of Microsoft[16]. The other effect based conclusions of the Commission weren’t examined. No justifications for the business model of the company were found and therefore the decision of the commission was confirmed.

5. Efficiencies

                The Commission has taken into account also the likely positive effects of the tying and bundling of products, therefore allows for an efficiency defence by referring to the general conditions for efficiency justification of abusive conduct. [17]  

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