The objectιve of this article is to analyze, mainly in the light of economic theory, how companies abuse their dominant position in the market, and specifically via the practice of tying / tied sales. Read our previous article to understand when a company holds a dominant position in the market. The topic is extremely current as many recent cases of breaches of antitrust rules revolve around the issue of tied sales, which have gained prominence in the European competition policy in several cases of abuse of a dominant position.
Tied sales relate to the dependence of the sale of a product on the purchase of other products. For example, the Sunday newspaper is provided along with a fashion insert on Sundays and the consumer is required to pay more for the newspaper that day. Other examples of tied sales are less obvious: the shoes are sold with laces, computers may include software applications, and hotels do not charge a separate fee for rooms and room service. The interesting thing about tied sales is that many of them are dictated by efficiency factors in the real market, which makes it extremely difficult to determine which ones are affected by competition and prosperity. In fact, most products have some aspect of tying due to efficiency reasons. Τhe principles of economies of scale imply that it is more effective to sell specific products together rather than on their own. Consumers can also benefit as they have the opportunity to consume products they would not otherwise be able to consume.
In many cases tying is used as an exclusion tool to extend the monopoly from the tying product market to the tied product market. In fact, tying leads the monopolists to be more competitive than they would be if they priced separately. This behavior reduces the alternative producers’ profits if they eventually stay in the market. The result is that the profits of the potential alternative producers’ can be reduced so much that they decide not to enter the market and this is the best-case scenario for the monopolists. It should be emphasized that competition cannot be restricted when tied sales are not carried out by companies without a dominant position.
It is important to note that the impact of tying on competition from companies with dominant position ranges from a small effect on the opponent’s ability to compete to the complete exclusion of existing or potential competitors. The scope depends on several factors: product complementarity, product size, product monopoly and economies of scale, marginal cost of tied product production, R&D incentives, mergers in complementary markets, network impact applications.
Below you can find the case study of Microsoft which demonstrated the implementation of competition policy:
Following an investigation, in 2004 the European Commission concluded that Microsoft had breached European Union competition law by exploiting its almost monopoly position in the PC operating system market to restrict competition in the server operating system markets and media players. In fact, the European Commission ruled that Microsoft had violated Article 82 by not giving consumers the option to acquire Windows without Windows Media Player (WMP). Microsoft had abused its dominant position in the operating system market (tying market), as it did not provide the option of an alternative operating system that did not provide for WMP.
According to the decision, the European Commission demanded the cessation of the affiliated sale of WMP (tied product) with Windows (tying product) (Kühn, Stillman and Caffarra, 2004). Although there was disagreement between the Commission and Microsoft over whether media players should be provided for free, the Commission required Microsoft to charge the same price for the two alternative versions of Windows (and prohibited charging more for the version without media playback features). The Court of First Instance (CFI) upheld the Commission’s decision in 2007. The Commission, by requiring the sale of a version of Windows without WMP (Windows-N), fined Microsoft € 497 million (Economides and Lianos, 2009).
To sum up, there are many reasons to choose tied sales. A company can do so by arguing for effectiveness, for price-related purposes, or for other strategic reasons. Although in many cases tying is due to such causes, very often linked sales are used for anti-competitive purposes, as discussed in detail above.
There is a consensus among economists that tying should not be seen as a ‘per se’ breach of antitrust law and that the ‘rule of reason’ should be included in the assessment of tied sales. However, apart from the basic principle that antitrust policy should balance potentially beneficial effects against potential anti-competitive effects, a simple legal model would not be appropriate to apply in anti-competitive cases as an appropriate antitrust policy depends on the characteristics of each case.