In a recent post, I presented an overview of the ICN’s recent Annual Conference in Sydney, Australia. Today I briefly summarize and critique a key product approved by the Conference, a new chapter 6 of the ICN’s Workbook on Unilateral Conduct, devoted to tying and bundling. (My analysis is based on a hard copy final version of the chapter, which shortly will be posted online at internationalcompetitionnetwork.org.)
Chapter 6 is the latest installment in the ICN’s continuing effort to present an overview of how different types of single firm conduct might be assessed by competition authorities, taking into account potential efficiencies as well as potential theories of competitive harm. In particular, chapter 6 defines tying and bundling; focuses primarily on theories of exclusionary anticompetitive effects; lays out potential evaluative criteria (for example, when tying is efficient, it is likely to be employed by a dominant firm’s significant competitors); and discusses the characteristics of tying/bundling. It then turns to theories of anticompetitive leveraging and foreclosure and price discrimination (avoiding taking a position as to whether price discrimination is a basis for condemning tying), and discusses how possible and actual anticompetitive effects might be observed. It then turns to justifications and defenses for tying and bundling, including reduced manufacturing and distribution costs; reduced customer transaction and search costs; improved product performance or convenience; and quality and safety assurance. The chapter then proclaims that “[t]he burden of demonstrating the likelihood and magnitude of actual or potential efficiencies generally is placed on an accused infringer”; states that “agencies must examine whether those claimed efficiencies actually arise from the tying arrangement, and whether there are ways to achieve the claimed efficiencies through less restrictive means”; and implicitly lends support to rule of reason balancing, noting that, “[i]n many jurisdictions if the party imposing the tie can establish that its claimed efficiencies would outweigh the anticompetitive effects then the conduct would not be deemed an infringement.” The chapter ends with a normative suggestion: “When the harm is likely materially greater than the efficiencies, the practice should be condemned. When the harm and the efficiencies both seem likely to be at the same rough magnitude, the general principle of non-interference in the market place may suggest that the practice not be condemned.”
Overall, chapter 6 presents a generally helpful discussion of tying and bundling, avoiding the misguided condemnations of these frequently efficient practices that characterized antitrust enforcement prior to the incorporation of modern economic analysis. This good chapter, however, could be enhanced by drawing upon sources that explore the actual effects of tying, such as a literature review that explains there is very little empirical support for the proposition that tying or bundling are actually anticompetitive. Chapter 6 could also benefit by setting forth a broader set of efficiency explanations for these practices, and by addressing the fact that using tying or bundling to gain market share at rivals’ expense need not imply consumer harm (the literature review noted above also addresses these points). If chapter 6 is revised, it should discuss these issues, and also include footnote and bibliographic evidence to the extensive law and economics literature on bundling and tying.
More generally, chapter 6, and the entire Workbook, could benefit by evincing greater recognition of the limits of antitrust enforcement, in particular, the inevitability of error costs in enforcement (especially since welfare-enhancing unilateral practices may well be misunderstood by enforcers), and the general desirability of avoiding false positives that discourage aggressive but efficiency-enhancing unilateral conduct. In this regard, chapter 6 could be improved by taking a page from the discussion of error costs in the U.S. Justice Department’s 2008 Report on Single Firm Conduct (withdrawn in 2009 by the Obama Administration). The 2008 Report also stated, with regard to tying, “that when actual or probable harm to competition is shown, tying should be illegal only when (1) it has no procompetitive benefits, or (2) if there are procompetitive benefits, the tie produces harms substantially disproportionate to those benefits.” As the 2008 Report further explained, the disproportionality test would make a good “default” standard for those forms of unilateral conduct that lack specific tests of illegality. Moving toward a default disproportionality standard, however, is a long-term project, which requires rethinking of unilateral conduct enforcement policy in the United States and most other jurisdictions.