A PYMNTS Company

Antitrust and nonexcluding ties

 |  October 19, 2012

Posted by D. Daniel Sokol

Herb Hovenkamp (Iowa) has written on Antitrust and Nonexcluding Ties.

ABSTRACT: Notwithstanding hundreds of court decisions, tying arrangements remain enigmatic. Conclusions that go to either extreme, per se legality or per se illegality, invariably make simplifying assumptions that frequently do not obtain. For example, by ignoring double marginalization or tying product price cuts it becomes very easy to prove that a wide range of ties are anticompetitive. At the other extreme, by ignoring foreclosure possibilities one can readily conclude that ties are invariably benign.

Ties have historically been thought to produce two kinds of competitive harm: “leverage,” or extraction; and foreclosure, or exclusion. The two theories are not mutually exclusive. Indeed, the premise of the foreclosure theory is that exclusion of rivals is harmful because it enables a firm to keep prices up or to prevent them from falling in response to the entry of new competitors. Ultimately, anticompetitive foreclosing ties must harm consumers.

Is there any reason for thinking that ties that do not exclude anyone should be condemned under the antitrust laws? The issue can arise in several different contexts. The most common is the “unwanted” tied product. The purchaser does not want the tied product at all and is objecting about being forced to take and pay for it. This is basically the facts of the Ninth Circuit’s Brantley case, in which cable television consumers complain that the defendant cable television provider offers programming only in large packages of channels. The complaint was dismissed because the plaintiffs could not identify any independent program providers who were excluded by the arrangement. Another subset of cases involves customers complaining about the way the seller allocates the price between the tying and tied goods, typically in order to facilitate price discrimination.

To be sure, customers may be injured when they want to purchase a smaller package than a seller wishes to sell. The customer might wish to buy a single residential lot rather than a rancher’s 1000 acre spread. Neither exclusion of a rival nor a restraint of trade producing lower market output is in prospect. Indeed, in a case such as Brantley the per channel cost of delivering a large number of channels is almost certainly lower than the per channel cost of delivering a few. The fixed cost component of a cable television system is a significant portion of its costs and the incremental costs of adding channels are very low. The Brantley plaintiffs simply want the seller to offer a smaller product. That is fundamentally not an antitrust problem.