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Section 1.

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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 Guidancewe 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.The concept of a dominant position has no legal definition, but it has been established in a long string of CJEU judgments. The ECJ has defined dominance in terms of an undertaking’s ‘economic strenght’ and its ability to act independently on the market. According to settled case law, dominance is a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers. 

Subsequent judgments and decisions have helped to give a clearer delineation of the concept. A dominant position does not preclude some competition, which it does where there is a monopoly or a quasi-monopoly, but enables the undertaking which profits by it, if not to determine, at least to have an appreciable influence on the conditions under which that competition will develop, and in any case to act largely in disregard of it so long as such conduct does not operate to its detriment.In the Commission's Guidance the Commission considers that an undertaking which is capable of profitably increasing prices above the competitive level for a significant period of time does not face sufficiently effective competitive constraints and can thus generally be regarded as dominant. 

The notion of independence is related to the level of competitive constraint facing the undertaking(s) in question. For dominance to exist the undertaking(s) concerned must have substantial market power.

 In this analysis important is in particular the market position of the allegedly dominant undertaking, the market position of competitors, barriers to expansion and entry, and the market position of buyers.

If an undertaking holds a high market share, it could be indicative of market power which could mean that existence of a dominant position. In Tetra Pak 2the General Court found that a market share of 90 percent was in itself evidence of a dominant position. The Commission's experience suggests that dominance is not likely if the undertaking's market share is below 40 % in the relevant market.However, in Klim the CJEU held that the undertaking’s market shares of 36 and 32 percent were compatible with it being in a dominant Position. 

Irrelevant of the market shares it holds, a firm can be considered as not being in a dominant position if expansion or entry is likely, timely and sufficient.

Moreover, as we have previously stated, dominance implies the possibility of acting independently of your customers. Countervailing buyer power might lead to the finding of lack of dominance, for example, where the buying side is highly concentrated (few buyers with high shares).

II. Distinct products

The products to be tied or bundled should be distinct. Two products are distinct if, in the absence of tying or bundling, a substantial number of customers would purchase or would have purchased the tying product without also buying the tied product from the same supplier, thereby allowing stand-alone production for both the tying and the tied product.

Evidence that two products are distinct could include direct evidence that, when given a choice, customers purchase the tying and the tied products separately from different sources of supply, or indirect evidence, such as the presence on the market of undertakings specialized in the manufacture or sale of the tied product without the tying product ( or of each of the products bundled by the dominant undertaking, or evidence indicating that undertakings with little market power, particularly in competitive markets, tend not to tie or not to bundle such products.

The Commission set therefore a demand test to identify whether customers have independent demands for each product as well as supply tests (there are companies that offers the products separately or are there manufacturers specializing in the production of the tied good only?).

Sometimes, it may be hard to determine if there are indeed two tied products. For example, in Microsoft, the undertaking claimed that you could not speak of separate products since there would be no demand for an operating system without a streaming media player. The Court rejected the argument, stating that just because two products are complimentary it does not mean that the practice is not an abuse.

  III. Coercion

As mentioned above, coercion to purchase two products was one of the relevant elements used in Microsoft case in order to establish abusive tying

. Coercion may take several forms:

(a) contractual coercion - when the requirement to buy product B is a condition for the sale of product A, i.e .a refusal to supply the tying  product separately;

(b) technical coercion is preventing the user from using the dominant product without the tied product; and

  (c) financial coercion, on the other hand, is a package discount making it meaningless to buy the tied product separately. This may be explicit in an agreement (for e.g. Tetra Pack II case) or de facto (for e.g. Hilti case).

According to the British Sugar case

, “reserving for itself the separate activity of delivering sugar” was sufficient as an anticompetitive effect. In Hilti case

, the Commission took the view that depriving the consumer of the choice of buying the tied products from separate suppliers was in itself abusive exploitation.

With respect to the method used for analyzing the anticompetitive effects (possible foreclosure on the market of the tied product) the assessment of the foreclosure effect on the tied market can be considered to consist of two parts:

(a) first, to establish which customers are “tied” in the sense that competitors to the dominant company cannot compete for their business; and

(b) second, to establish whether these customers “add up” to a sufficient part of the market being tied.

V. Objective and Proportionate Justification

As per the Discussion Paper’s

and Commission Guidelines

tying and bundling may be justified on a legitimate and proportionate basis. 

A dominant undertaking may justify its behavior either by demonstrating that its conduct is objectively necessary or by demonstrating that its conduct produces substantial efficiencies which outweigh any anticompetitive effects on consumers. In this context, the Commission will assess whether the conduct in question is indispensable and proportionate to the goal allegedly pursued by the dominant undertaking.

The question of whether conduct is objectively necessary and proportionate must be determined on the basis of factors external to the dominant undertaking.

 Exclusionary conduct may, for example, be considered objectively necessary (a) for health or safety reasons related to the nature of the product in question; or (b) on the ground of efficiencies that are sufficient to guarantee that no net harm to consumers is likely to arise.

However, proof of whether conduct of this kind is objectively necessary must take into account that it is normally the task of public authorities to set and enforce public health and safety standards

.

In this context, the dominant undertaking will generally be expected to demonstrate, with a sufficient degree of probability, and on the basis of verifiable evidence, that the cumulative conditions set in par.30 of the Commission’s guidance.

Therefore, if the European Commission manages to prove the existence of the first four requirements, the burden of proof for objective justification for the practice of tying and bundling shifts to the defendant. This is also expressly stated in Case T201/04, Microsoft v Commission “although the burden of proof of the existence of the circumstances that constitute an infringement of Article [102] is borne by the Commission, it is for the dominant undertaking concerned, and not for the Commission, before the end of the administrative procedure, to raise any plea of objective justification and to support it with arguments and evidence.

Legitimate objectives put forward for practicing tying and bundling must be genuine.

A legitimate objective is when tying and bundling enhances efficiency because it is more costly to produce, or distribute the tied products separately, or there might be a need to ensure the quality or safety of the products. 

In the Commission Guidelines, the Commission noted that tying and bundling may give rise to an objective justification by producing savings in production, distribution and transaction costs and that. In addition the Commission may also examine whether combining two independent products into anew, single product might enhance the ability to bring such a product to the market to the benefit of customers.

Subsection 1.1.

Subsection 1.1.1.

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