Tying Arrangements and the Leverage Problem

TLDR

Antitrust law treats tying a patented product to a second product as an automatic violation, viewing it as a trade‑restraining device that can create a new monopoly by extending the market for the tied product beyond what competition would allow. This article investigates whether tying agreements generate new monopolies by comparing a complementarity view of tying with alternative explanations such as price‑regulation evasion and price‑discrimination counting.

Abstract

IN antitrust law, the conclusion that tying the sale of a second product to a patented product is automatically illegal has been accepted by courts .forforty years.'Under this theory, tying is harmful because it creates a new monopoly wholly outside the patent.Conditioning the sale or lease of one commodity on the sale or lease of another, a practice known as a tying agreement or a tie-in, is generally considered a trade-restraining device.The recent Report of the Attorney General's Committee to Study the Antitrust Laws declares that the purpose of a tying contract is monopolistic exploitation. 2This exploitation is achieved by "artificially extending the market for the 'tied' product beyond the consumer acceptance it would rate if competing independently on its merits and on equal terms." "Wielding monopolistic leverage" is an ambiguous phrase.A distinction can usefully be made between leverage as a revenue-maximizing device and leverage as a monopoly-creating device.The first involves the use of existing power.The second requires the addition of new power. 4 In both cases monopoly is tAssociate Professor of Law and Economics, Yale Law School.This Article attempts to explore the relationship between product complementarity and tying sales as contrasted with other explanations which have been offered.A "complementarity" view of tying sharply contrasts with other positions in terms of what is called the "leverage" problem.In particular, two explanations have been formulated by Professor Aaron Director-tying as an evasion of price regulation and tying as a counting device for price discrimination.I have reconstructed these explanations as I understood them from previous discussions with him over a period of years ending in 1956 at the University of Chicago Law School.Professor Director, of course, bears no responsibility for my interpretation; my debt to him is great, however, not only for encouraging my interest in the tie-in problem but more basically for providing both a theory and an application of the "evasion" and the "counting" cases, reproduced here The conclusions contained in this Article derive from comparison of these examples with the "complementarity" example to determine whether or not tie-ins create new monopoly.The relationship between product complements and the use of the tying device was developed jointly with John S. McGee, Associate Professor in the School of Business at the University of Chicago.