Transcript Tying - WordPress.com

An Analysis of
Trident v. Independent Ink
Wenjia Sheng, Minyi Zhu
April, 2016
Summary
 Introduction
 Background
 Presumption
 Result
 From the Case to Economic Analysis
 Economic Analysis
 Our Views
Q&A
Introduction
In 2006, the Supreme Court used Trident v.
Independent Ink case to overturn a line of cases
that had recognized a presumption of market
power for patented tying products.
Background
Trident
Description
A subsidiary of Illinois Tool Works,
which is a leading manufacturer of
printheads (patented)
Price of
equivalent
ink
$325/per bottle
Independent Ink
a small but reputable
manufacturer and its ink is
compatible with Trident
printheads
$125 - $189/per bottle
Lawsuits Between Two Companies
In 1997
In 1998
Sued Independent Ink for patent
infringement;
But, was dismissed for lack of
personal jurisdiction
Found Trident’s patents were
invalid to show that they did not
infringe the patents
Background
Trident
Independent Ink
Countersued for patent
infringement
Amended its complaint to include claims of
monopolization and illegal tying
Federal District Court: dismissed
the patent infringement claim
Meanwhile
The District Court: granted
summary judgment because of no
economic analysis demonstrating
that Trident had market power
The District Court: refused to apply the
presumption of market power and reserved it
After 2004,
The Court of Appeals for the Federal Circuit:
agreed with the district court and
acknowledged the criticism of the
presumption  only Congress or the Supreme
Court could alter it
Presumption
Cases according to the presumption
(the precedent from the Supreme Court):
International Salt (1947) – patented machine and salt
Loews (1962) – blocking book of movies
Jefferson Parish (1984) – hospital
The presumption was open to the obvious criticism that
most patents have little or no value, and therefore cannot
obtain or possess significant market power by themselves.
Result
Besides,
Independent Ink was given an
opportunity to demonstrate that
Trident did indeed have market
power and thus violated §1 of the
Sherman Act through its tying
contract.
§ 1:
“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of
trade or commerce among the several States, or with foreign nations, is declared to be illegal."
From the Case to Economics Analysis
The ability of a firm to exercise and extend market power
via tying is the biggest conflict between Trident and
Independent Ink. Tying creates an opportunity to meter
usage and thereby increase profits.
We will focus on tying in the economic analysis part.
Economic Analysis
1. Concepts
1) Tying Instrument
2) Bundling Instrument
3) Metering
4) Direct Metering
5) Indirect Metering
2. Modeling Tying: Indirect Metering Device
1.1 Tying Instrument
Tying occurs when a seller requires to purchase not only a
certain good, but also all the units a consumer wishes to buy
of another good: here the two goods are sold together in
variable proportions.
Instances: mobile phone set + phone calls
copy machine + toner
1.2 Confusable Concept: Bundling Instrument
A product is offered by a seller under the condition that
another product is also bought. The different goods are sold
together in fixed proportions.
Instances: plane ticket + hotel accommodation
computers + application software
car + tires, air-conditioning, engine and seats
shoes + strings
…
1.3 Metering
Metering, a major requirements tying device, is a practice
under which a customer is charged a price based on his or
her use of the product.
This allows the seller to raise its profits by charging more to
high-value customers while still making sales at lower prices
to low-value customers, which can be understood as a
useful price discrimination tool.
1.4 Direct Metering
Under direct metering, the customer is charged a per-use or
metered fee.
For example,
Monsanto (a sustainable agriculture company that delivers
agricultural products that support farmers all around the
world) charged a per-acre technology use fee for its
patented Roundup ready seeds.
Summit (an ambulatory surgery center) charged doctors a
per-use fee for its patented laser eye surgery device.
1.5 Indirect Metering
Under indirect metering, the fee is based on the use of a
complementary product, as with printheads and ink in our
case.
There are three salient features of a requirements tying
used for indirect metering:
First, the two products are essential complements in that
the original product is of no value without the tied product.
Second, the value of the original product is related to its
intensity of use as measured through consumption of the
complement. More frequent use of original product
requires more complementary products, thereby allowing
the seller to charge more to and earn more from high-value
customers.
The final ingredient of indirect metering is that the tied
aftermarket product is sold at a price premium. The price
premium is how the firm profits from additional usage. As a
result, the customer would prefer to buy the tied product
elsewhere but is prevented from doing so either by contract,
technology constraints, or lack of alternatives.
The ability to engage in price discrimination via metering is
evidence of market power.
In the case of Trident v Independent Ink, customers who
were the largest volume users of the ink jet printers were
the most profitable. Were a rival to have offered an
equivalent printer at a higher price combined with ink sold
at marginal cost, this would have been attractive to the
large-volume customers. The fact that a firm could
profitably enter with a single-price contract (but none did) is
evidence that Trident was exercising market power.
2. Modeling Tying: Indirect Metering Device
 Assumptions:
• A consumer of type i = l, h (indicating low-value and highvalue customers respectively)
• One unit of product A (the original good)
• q units of product B (a complementary good)
• Utility function: Ui = q – q2/2vi
• Consuming the goods separately gives zero utility.
• Buying more than one unit of good A does not add to
utility.
• Type-l consumers have lower intensity of demand (vl < vh)
•
•
•
•
•
A share λ of the population (of size 1 for simplicity), 1-λ
being the share of type-h consumers.
Good A is monopolized by firm 1.
Several firms having identical technology - including firm
1-are involved in the production of good B. (There is
price competition in the B market.)
The cost of producing one unit of the product are
respectively cA and cB < 1.
No fixed costs.
 No tying (if all consumers buy):
• Maxq Ui – pA– pBq
• Setting dUi /dq = 0, we have:
qi = vi (1– pB)
• Given that CSi = Ui – pA – pBqi is non-negative, after
substitution, we have:
CSi = vi (1– pB)2 /2 – pA ≥ 0
• Price competition on B market implies that pB = cB.
• Firm 1 chooses prices so that all consumers buy:
pANT = vl (1– cB)2/2 (vl < vh)
• In this case, type-l consumers will have zero surplus,
whereas type-h consumers will have a surplus :
CShNT=(vh–vl)(1–cB)2/2
• Producer surplus equals firm 1’s profits from good A:
πNT= vl (1– cB)2/2 – cA
• Therefore, welfare will be equal to:
 Tying :
• Firm 1 requires consumers who want to buy good A also
to buy good B from it.
• It is a strong assumption, that it is endowed with some
technology that allows firm 1 to monitor consumers’
purchases of good B, and to prevent them from
addressing competitors to buy good B after having
bought one unit of good A with a symbolic quantity of B.
• From equation qi = vi (1– pB), firm 1’s profits are:
π = (pB– cB)(λvl(1 – pB) + (1 – λ)vh(1 – pB)) + pA – cA
• From dπ/dpB = 0, we have:
>
> > cB
• Since pBT > cB, it is crucial that firm 1 is able to prevent
consumers from buying good B from competitors.
• Consumers will buy both goods as long as:
CSi = vi (1 – pBT)2/2 – pA ≥ 0
• After replacement, we obtain:
,
which can either be bigger or smaller than cA.
• Here tying works in a very similar way as a two-part tariff
scheme T + pq that segments consumers according to
their intensity of demand. The fixed fee part of the tariff, T,
corresponds to pAT , whereas the variable part of the tariff
corresponds to pBT.
• The lower the intensity of demand of a consumer the
lower the number of units of good B he will buy from the
monopolist, as qi = vi (1 – pBT), and therefore the lower the
total amount paid to it.
• Firm 1’s profits under tying are:
• Type-l consumers have zero surplus, whereas type-h
consumer surplus is:
• Welfare can be computed:
-
- CA
 Comparisons of equilibria : both types are served
• Tying is profitable:
• It allows the monopolist to impose higher payments from
consumers who have a higher intensity of demand.
• Tying is detrimental to welfare:
WNT – WT=
>0
• We can notice that welfare should be lower under tying.
Indeed, if there is no tying, consumers buy at marginal
cost, and welfare is therefore the highest possible,
whereas tying introduces a source of allocative
inefficiency as good B is sold above marginal cost. We are
therefore in the usual case where a higher price decreases
CS (CSh, since CSl=0 in either regime)more than it
increases PS.
Our Views
 Efficiency reasons for tying
• Natural Efficiency Rationale
In many cases the principles of scale economies imply
that it is more efficient that certain components are
marketed together rather than separately.
• Company Incentives
Preservation of Quality and Reputation
Risk Allocation Efficiencies
Leveraging Market Power
…
 Alternative Explanations
• As the monopolist uses metering to capture more surplus
from large customers, this may lead to small and medium
customers’ being excluded entirely from the market.
• Furthermore, firms will find resistance to their attempts
to impose tying. This resistance leads to an oftenoverlooked inefficiency: Firms spend significant resources
to impose tying, while consumers spend resources to
avoid being subject to tying.
• A third reason is that no firm has a perfect monopoly.
Consumers can find ways to create substitutes. Thus,
high-value customers distort their behavior, which ends
up being costly.
Q&A
Thanks for your listening!