Bundling and Competition Law in China: Sage Comments by the Scalia Law School’s Global Antitrust Institute

Alden Abbott —  22 March 2017
  1. Introduction

For nearly two years, the Global Antitrust Institute (GAI) at George Mason University’s Scalia Law School has filed an impressive series of comments on foreign competition laws and regulations.  The latest GAI comment, dated March 19 (“March 19 comment”), focuses on proposed revisions to the Anti-Unfair Competition Law (AUCL) of the People’s Republic of China, currently under consideration by China’s national legislature, the National People’s Congress.  The AUCL “coexists” with China’s antitrust statute, the Anti-Monopoly Law (AML).  The key concern raised by the March 19 comment is that the AUCL revisions not undermine the application of sound competition law principles in the analysis of bundling (a seller’s offering of several goods as part of a single package sale).  As such, the March 19 comment notes that the best way to avoid such an outcome would be for the AUCL to avoid condemning bundling as a potential “unfair” practice, leaving bundling practices to be assessed solely under the AML.  Furthermore, the March 19 comment wisely stresses that any antitrust evaluation of bundling, whether under the AML (the preferred option) or under the AUCL, should give weight to the substantial efficiencies that bundling typically engenders.

  1. Highlights of the March 19 Comment

Specifically, the March 19 comment made the following key recommendations:

  • The National People’s Congress should be commended for having deleted Article 6 of an earlier AUCL draft, which prohibited a firm from “taking advantage of its comparative advantage position.” As explained in a March 2016 GAI comment, this provision would have undermined efficient contractual negotiations that could benefited consumer as well as producer welfare.
  • With respect to the remaining draft provisions, any provisions that relate to conduct covered by China’s Anti-Monopoly Law (AML) be omitted entirely.
  • In particular, Article 11 (which provides that “[b]usiness operators selling goods must not bundle the sale of goods against buyers’ wishes, and must not attach other unreasonable conditions”) should be omitted in its entirety, as such conduct is already covered by Article 17(5) of the AML.
  • In the alternative, at the very least, Article 11 should be revised to adopt an effect-based approach under which bundling will be condemned only when: (1) the seller has market power in one of the goods included in the bundle sufficient to enable it to restrain trade in the market(s) for the other goods in the bundle; and (2) the anticompetitive effects outweigh any procompetitive benefits.  Such an approach would be consistent with Article 17(5) of the AML, which provides for an effects-based approach that applies only to firms with a dominant market position.
  • Bundling is ubiquitous and widely used by a variety of firms and for a variety of reasons (see here). In the vast majority of cases, package sales are “easily explained by economies of scope in production or by reductions in transaction and information costs, with an obvious benefit to the seller, the buyer or both.”   Those benefits can include lower prices for consumers, facilitate entry into new markets, reduce conflicting incentives between manufacturers and their distributors, and mitigate retailer free-riding and other types of agency problems.  Indeed (see here), “bundling can serve the same efficiency-enhancing vertical control functions as have been identified in the economic literature on tying, exclusive dealing, and other forms of vertical restraints.”
  • The potential to harm competition and generate anticompetitive effects arises only when bundling is practiced by a firm with market power in one of the goods included in the bundle. As the U.S. Supreme Court explained in Jefferson Parrish v. Hyde (1984), “there is nothing inherently anticompetitive about package sales,” and the fact that “a purchaser is ‘forced’ to buy a product he would not have otherwise bought even from another seller” does not imply an “adverse impact on competition.”  Rather, for bundling to harm competition there would have to be an exclusionary effect on other sellers because bundling thwarts buyers’ desire to purchase substitutes for one or more of the goods in the bundle from those other sellers to an extent that harms competition in the markets for those products (see here).
  • Moreover, because of the widespread procompetitive use of bundling, by firms without and firms with market power, making bundling per se or presumptively unlawful is likely to generate many Type I (false positive) errors which, as the U.S. Supreme Court explained in Verizon v. Trinko (2004), “are especially costly, because they chill the very conduct the antitrust laws are designed to protect.”
  1. Conclusion

In sum, the GAI’s March 19 comment does an outstanding job of highlighting the typically procompetitive nature of bundling, and of calling for an economics-based approach to the antitrust evaluation of bundling in China.  Other competition law authorities (including, for example, the European Competition Commission) could benefit from this comment as well, when they scrutinize bundling arrangements.

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.