Economics of Regulation
Vertical Restraints
TieTie-In Sale
Definition
Sale of good X is conditional on the buyer’s
promise to buy good Y. (IBM’s selling punch
cards with computers).
TieTie-In Sale
A. Antitrust Objections
• 1. Can be used to exclude or foreclose small
sellers from a particular market. (Cable
company requiring wiring done by them.)
• 2. Monopolist is able to extent its power into
another market. (Kodak selling film wit
processing FREE.)
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TieTie-In Sale
• 3. Creates barriers to entry, since entrant
would have to sell both products.
• 4. Aids cartel discipline. One way to cheat is to
discount a related product. If products are
bundled, this option is not available.
• 5. Aids price discrimination by “metering”.
(IBM with punch cards; XEROX with paper and
toner.)
TieTie-In Sale
B. Legal Treatment
• 1. Section 1 prohibits it but is not explicit.
• 2. Section 3 of Clayton Act...”It shall be unlawful ... to
lease or sell goods...on the condition, agreement or
understanding that the lessee or purchaser thereof
shall not use or deal in the goods...of a competitor or
competitors of the lessor or seller, where the
effect...may be to substantially lessen competition or
tend to create a monopoly in any line of commerce.
• 3. Tie-ins are almost illegal per se
Exclusive Dealing
- firm X sells to Y on the
condition that it accepts no goods from X’s competitors.
A. Antitrust Objections
• 1. Market foreclosure
• 2. Inhibit entry
B. Legal Treatment
• 1. Rule of Reason - same Section 3 of Clayton
Act
Vertical Restraints
A. Resale Price Maintenance - producer
specifies the prices that wholesalers or
retailers may charge when reselling the
producer’s product.
B. Exclusive Territory - wholesaler or
retailer is granted a certain geographic
region where only s/he can resell.
Vertical Restraints
C. Anti-efficiency motives - cartel of
retailers or manufacturers
D. Pro-efficiency motives - expert sales
staff - don’t want people going across the
street after salesperson at another store
spent 3 hours helping a person decide
which model to buy.
Baldwin article
Structure, Conduct, Performance are not three
independent measures. We all recognize that
structure can lead to some conduct problems, but
Baldwin argues that there is a feedback effects
such that certain conduct can lead to certain
structure, i.e. tie-in sales may need monopoly
power but the conduct itself will lead to more
monopolization in structure.