Abstract
Current tying law uses a bifurcated rule of reason, condemning ties that involve either tying market power or a substantial tied foreclosure share, absent an offsetting procompetitive justification. Many critics of tying law advocate overruling the first branch, commonly called the quasi per se rule, thus rendering all ties without a substantial foreclosure share per se legal. This article shows they are mistaken. Even without substantially foreclosing market share, ties with market power restrain competition in ways that are likely to harm both consumer welfare and total welfare if they foreclose a substantial dollar amount of sales. Critics claim that these are not cognizable anticompetitive effects because they do not impair the general ability of rivals to compete for unrestrained sales. Their position conflicts with legal precedent and with the principle that antitrust protects competition, not competitors. Both precedent and economics also show that critics are wrong in claiming that no valid distinction exists between setting a profit-maximizing price and extracting the remaining consumer surplus through tying agreements. Given that the critics acknowledge that consumer welfare and total welfare are harmed by some ties with market power that lack a substantial foreclosure share, even their own analysis fails to support their position of per se legality for such ties. It would instead support the current doctrine that sorts out the ties with market power that harm consumer welfare from those that do not.
Highlights
Current tying law uses a bifurcated rule of reason, condemning ties that have either tying market power or a substantial tied foreclosure share, absent an offsetting procompetitive justification
Because even the critics admit that consumer welfare and total welfare are harmed by some ties with market power that lack a substantial foreclosure share, even their own analysis fails to support their position of per se legality for such ties
Even if one holds the former view, the better solution is to reform patent law to provide optimal incentives for all innovations, not to try to offset the problem imperfectly by modifying antitrust law to allow greater extraction of total surplus for the subset of innovations where tying is effective at achieving such extraction. The latter strategy would distort investments towards those innovations for which tying is feasible, rather than towards those innovations that are the most socially valuable. It would be better if we renamed the quasi per se rule what it is: one branch of a bifurcated rule of reason that correctly identifies the necessary conditions for certain types of anticompetitive effects, namely the tying market power and substantial dollar amount of tied sales that are necessary for extraction and price discrimination effects that significantly harm consumer welfare
Summary
This paper can be downloaded without charge from: The Harvard John M. REHABILITATING JEFFERSON PARISH: WHY TIES WITHOUT A SUBSTANTIAL FORECLOSURE SHARE
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