Transcript Standard Setting in High

Class 12
Antitrust, Fall, 2015
Tying
Randal C. Picker
James Parker Hall Distinguished Service Professors of Law
The Law School
The University of Chicago
773.702.0864/[email protected]
Copyright © 2000-15 Randal C. Picker. All Rights Reserved.
Clayton Act Sec. 3

It shall be unlawful for any person engaged in
commerce, in the course of such commerce,
to
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lease or make a sale or contract for sale of
goods, wares, merchandise, machinery, supplies,
or other commodities, whether patented or
unpatented, for use, consumption, or resale within
the United States or any Territory thereof or the
District of Columbia or any insular possession or
other place under the jurisdiction of the United
States, or fix a price charged therefor, or discount
from, or rebate upon, such price,
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Clayton Act Sec. 3

on the condition, agreement, or understanding
that
the
lessee or purchaser thereof shall not use or
deal in the goods, wares, merchandise,
machinery, supplies, or other commodities of a
competitor or competitors of the lessor or seller
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Clayton Act Sec. 3

where the effect of
such
lease, sale, or contract for sale or such
condition, agreement, or understanding may be to
substantially lessen competition or tend to create
a monopoly in any line of commerce.
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The Left Shoe Monopolist

Situation
M
has a monopoly in the production of left shoes.
Marginal cost of making a left shoe is $1.
Anyone can produce right shoes at a marginal
cost of $1.
Customers value pairs of shoes at $102.
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The Left Shoe Monopolist

What should our monopolist do?
Sell
left shoes alone?
Offer both and let consumers choose?
Require consumers to buy both?
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Fixed Proportions and Tying

Don’t Need To Tie Shoes
M
can extract the full monopoly profit by setting a
price for left shoes of $101.
Absent a more sophisticated story, tying will not
increase the profits of M in the fixed proportions
case.
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Effects of a Metering Tie

Two Consumers with Different Demands for
Printing
P
100
100
40
40
1 2
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P
Andy
’000 pages
Bill
1
2 3 4
’000 pages
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Effects of a Metering Tie

Cost and Choice Structure
Assume
$20 to make printer and zero to make
toner cartridge
Monopoly seller of machine, toner market
competitive
Machine seller can set single price for machine or
tie toner cartridge purchases to machine
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Effects of a Metering Tie
Profit
Social
welfare
140 – 20 + 140 – 20 =
280 – 20 =
240
260
380
260
$60|$40 (60 + 80 – 20) + (60 +
160 – 20) =
320
380
Single $140
price $280
Tie
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Effects of a Metering Tie

If tying is barred
Sets
single price of $280 with overall social
welfare of $260 (and profits of $260)

If tying is allowed
Ties
with prices of $60/$40
Profits are $320 and social welfare is $380

Tying improves the outcome
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Effects of a Metering Tie (V2)

Two Consumers with Different Demands for
Printing
P
P
150
Andy
100
Carly
90
40
1 2
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’000 pages
1 2
’000 pages
14
Single $140
140 – 20 + 140 – 20 =
price $240
240 – 20 =
Meter $0|$100 (0 + 100 – 20) + (0 +
100 – 20) =
$10|$90 (10 + 90 – 20) + (10 +
180 – 20) =
(60
+
80
–
20)
+
(60
+
$60|$40
80 – 20) =
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Profit
Social
welfare
240
220
160
340
220
210
250
300
240
340
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Effects of a Metering Tie

If tying is barred
Sets
single price of $140 with profits of $240 and
social welfare of $340

If tying is allowed
Will set prices of $10/$90 with profits of $250 and
social welfare of $300


Tying makes matters worse
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Fixed v. Variable Proportions

Variable Proportions Case
We
cannot make a general statement about social
welfare and tying in the variable proportions case.
Price discrimination through tying can either
increase welfare or reduce it.

Fixed Proportions Case
Tying
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should not increase profits, so we should
expect other motives to be at work.
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Metering and Tying

Monopoly over Machine
How
do I exploit my monopoly power over the
machine?

More than One Price
I
would like to charge different customers different
prices for the machine
How do I do that?
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Metering and Tying


No Desire as Such to Extend Monopoly (or
Leverage Monopoly) to Second Good
Use Second Good to Create Multiple Prices for
Monopolized Machine
With
non-competitive price on consumable (punch
card or salt) heavy users effectively pay more for
machine
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Metering and Tying

Technological Change and Metering
Much
easier these days to assess use of machine
directly and charge accordingly
Less reason to use consumables as counting
mechanism
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Starting Point I

Starting a New Hospital
Hospital
advertises for new employees including
anesthesiologists
Hires some, rejects others
Do the rejected have an antitrust claim? On what
theory? Under Sec. 1? Sec. 2?

Is this different than Jefferson Parish?
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Starting Point II

Selling Hotdogs
set up a cart on 60th St. to sell hotdogs
I will only sell hotdogs and buns together; I never
sell one without the other
Do customers have an antitrust claim? On what
theory? Under Sec. 1? Sec. 2?
I

Is this different than Jefferson Parish?
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Jefferson Parish (US, 1984)

Key Facts
Exclusive
contract for anesthesiological services
between hospital and Roux and Assoc.
Hyde sought admission to staff of East Jefferson
Hospital, and denied
Feb. 1971 Contract
 Signed before hospital opened
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Jefferson Parish
 Roux
could designate anesthesiologists for
admission to EJH staff
 EJH appointed nursing staff, subject to Roux
approval
 EJH would use Roux exclusively and vice versa
1976 Contract
 Seemingly drops exclusivity on both sides but
EJH remains exclusive
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Jefferson Parish

Market Info
20
hospitals in New Orleans metro area
70% of those in Jefferson Parish go to hospitals
other than EJH
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What Does This Mean?

Per the Court
“Thus,
the law draws a distinction between the
exploitation of market power by merely enhancing
the price of the tying product, on the one hand,
and by attempting to impose restraints on
competition in the market for a tied product, on the
other.”
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What Does This Mean?

Per the Court
“When
the seller’s power is just used to maximize
its return in the tying product market, where
presumably its product enjoys some justifiable
advantage over its competitors, the competitive
ideal of the Sherman Act is not necessarily
compromised.”
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What Does This Mean?

Per the Court
“But
if that power is used to impair competition on
the merits in another market, a potentially inferior
product may be insulated from competitive
pressures.”
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What Does This Mean?

Per the Court
“This
impairment could either harm existing
competitors or create barriers to entry of new
competitors in the market for the tied product, and
can increase the social costs of market power by
facilitating price discrimination, thereby increasing
monopoly profits over what they would be absent
the tie.”
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Tying Tests

Power and Forcing
“[T]he
essential characteristic of an invalid tying
arrangement lies in the seller’s exploitation of its
control over the tying product to force the buyer
into the purchase of a tied product that the buyer
either did not want at all, or might have preferred
to purchase elsewhere on different terms.”
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Tying Tests

Per se illegal
if
“substantial volume of commerce is foreclosed
thereby.”
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Separateness


Tying requires two distinct products
What makes for separate products?
Functional
relation?
 Do we ever see anesthesiological services
purchased without a hospital operating room?
Character of demand?
 Even if simultaneous use is inevitable, do
consumers want to self-bundle?
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Test

Separate Consumer Demand
“Thus,
in this case no tying arrangement can exist
unless there is a sufficient demand for the
purchase of anesthesiological services separate
from hospital services to identify a distinct product
market in which it is efficient to offer
anesthesiological services separately from
hospital services.”
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Kodak (US, 1992)

Key Facts
Kodak
sells copying machines
Independent service organizations (ISOs) emerge
to service machines using Kodak parts
Kodak restricts access to parts: get Kodak parts
only if self-service or use Kodak service
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Defining Markets

Two Markets?
Original
equipment market
After-market
 For parts and service
 Kodak has 80 to 95% of the services market for
Kodak copiers
 Kodak has 100% of parts market for Kodak
copiers
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Defining Markets

The After-Market
Parts
are not interchangeable
 Separate markets for parts of each copier brand
Service may be interchangeable
 The precise point of ISOs
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Fixed or Variable Proportions?


How should this case be classified?
Tricky
Yes,
consumers use different amounts of the
after-market services/parts, so that is variable
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Fixed or Variable Proportions?
But:
tie is between parts and service and that is
fixed proportions
 Ask: couldn’t Kodak get full monopoly profits in
the after-market just through setting the right
price for parts?
 Why does Kodak want to sell service if ISOs can
do it at lower cost?
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Doing the Tying Analysis


How should we evaluate separateness under
Jefferson Parish
Self-Bundling
Again,
even if used together functionally,
consumers may want to self-bundle

Assessing Market Power
Does
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competition in the equipment market protect
against monopoly power in the after-market?
 Competing for exclusive relationship?
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Attempted Monopolization Claim

The Question
Turns
completely on market definition
 Kodak has 100% of parts market
Can a single brand be a market?

The Response
Brand
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consistency and responsibility confusion
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Attempted Monopolization Claim
 Standard
tying claim: set standards, don’t
require just your parts
Barring free riding by ISOs
 “This understanding of free-riding has no
support in our case law. To the contrary, … one
of the evils proscribed by the antitrust laws is the
creation of entry barriers to potential competitors
by requiring them to enter two markets
simultaneously.”
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