Project Report on Tying

Submitted By:
1. Rohit Mundra (14HS20032)
2. Rishabh Surana (14HS20031)

DEFINITION OF 'TYING'
An often illegal conditional purchase where, in order to buy one product, the
consumer must purchase another product that exists in a separate market. In
other words it is a form of price discrimination in which one durable good or
the base good is tied to a more disposable good or the variable good.

Firms discriminate by pricing the base good close to marginal cost and
the variable good is priced above marginal cost.

Firms basically charge a different price to every consumer based on

their usage of the variable good.

Tying arrangements are frequently illegal if the tied products are not
considered naturally related or if a separate market exists for the tied
good.

Q. What are the types of Tying?

Horizontal tying is the practice of requiring consumers to pay for an
unrelated product or service together with the desired one. A hypothetical
example would be for a company to sell its pens only with its lighters.
(However, a company may offer a limited free item with another purchase as
a promotion.)

Vertical tying is the practice of requiring customers to purchase related

products or services together, from the same company. For example, a
company might mandate that its automobiles could only be serviced by its
own dealers. In an effort to curb this, many jurisdictions require that
warranties not be voided by outside servicing.
Q. DIFFERENCE between Bundling and Tying?
Tying is different from bundling because in bundling the consumer might
have been happy to buy just one of the products. In case of tying, the first
product is useless without access to the secondary product.

Q. WHY might firms use this kind of pricing

practice?
One of the main benefits of tying is that it often allows a firm to meter
demand and thereby practice price discrimination more effectively.

Q. What are EFFECTS of Tying?

One effect of tying can be that low quality products achieve a higher
market share than would otherwise be the case.

Tying may also be a form of price discrimination: people who use more
razor blades, for example, pay more than those who just need a one-
time shave. Though this may improve overall welfare, by giving more
consumers access to the market, such price discrimination can also
transfer consumer surpluses to the producer.

Tying may also be used with or in place of patents or copyrights to help

protect entry into a market, discouraging innovation.

Q. What are some REAL Life examples of Tying?

1. HP Printers

HP printers are very cheap but the ink is more expensive than champagne!
The printers will only work with HP ink cartridges. What people are buying is
the ability to print color photos some people have high willingness to pay
others low. Those who are high users likely have a higher willingness to pay.
Tying cause high users to pay more per photo than low users (a kind of price
discrimination).

In this case, since price is greater than marginal cost for the ink, the people
who have a high willingness to pay are being charged much more than the
people with lower the lower willingness to pay. Indeed, the price is different
depending on exactly how many photos one prints. Tying is a pretty flexible
way of charging different prices to different people.

Tying tends to increase social welfare because it typically increases output. If

printers are not tied to ink, then in this system people who want to print a lot
of color photos, well theyll continue to buy. Theyll be better off. But, the
people who only wanted to print a few photos however they probably wont
buy at all. Output, therefore, in total, is probably lower without tying. That
also means social welfare would be lower.

2. IBM Mainframes

A historical example of tying occurred years ago when lessees (tenants)

of IBM mainframes had to also agree to buy punch cards only from IBM.
Those tied IBM punch cards were sold at a higher price than on the open
market meaning that those mainframe customers would have been better off
from a cost standpoint with the same leasing contract minus the tying
clause. But one could also argue that tying the products this way improved
competition. It could be that IBM was trying to charge heavy users of the
computer more than light users by putting a surcharge on the punch cards. If
so, IBM found a way to bill customers for one of its primary costs, computer
maintenance. The practice would theoretically then encourage customers to
optimize their use of the computer rather than use it excessively, which
could be considered a pro-competition practice.

3. Apple products

The tying of Apple products is an example of commercial tying that has

caused recent controversy. When Apple initially released the iPhone on June
29, 2007, it was sold exclusively with AT&T contracts in the United States. To
enforce this exclusivity, Apple employed a type of software lock that ensured
the phone would not work on any network besides AT&T's. Any user who
tried to unlock or otherwise tamper with the locking software ran the risk of
rendering their iPhone permanently inoperable. This caused complaints
among many consumers, as they were forced to pay an additional early
termination fee of $175 if they wanted to unlock the device safely for use on
a different carrier.

In July 2010, federal regulators clarified the issue when they determined it
was lawful to unlock (or in other terms, "jail break") the iPhone, declaring
that there was no basis for copyright law to assist Apple in protecting its
restrictive business model.

4. Microsoft products

Another prominent case involving a tying claim was United States - Microsoft.
Microsoft ties together Microsoft Windows, Internet Explorer, Windows Media
Player, Outlook Express and Microsoft Office. The United States claimed that
the bundling of Internet Explorer (IE) to sales of Windows 98, making IE
difficult to remove from Windows 98 (e.g., not putting it on the "Remove
Programs" list), and designing Windows 98 to work "unpleasantly" with
Netscape Navigator constituted an illegal tying of Windows 98 and
IE. Microsoft's counterargument was that a web browser and a mail reader
are simply part of an operating system, included with other personal
computer operating systems, and the integration of the products was
technologically justified.

5. The Kodak Case

No discussion of tying would be complete without mentioning the case of

Eastman Kodak Company. Kodak manufactures sells photocopiers and
micrographic equipment and also sells replacement parts and service for its
equipment. Independent service organizations (ISOs) also provide service for
Kodak equipment, typically at a lower price than that offered by Kodak.
Customers of Kodak equipment could buy the replacement parts themselves
and hire the ISOs to service the machines or they could hire the ISOs to
provide both the replacement parts and the service. Or, customers could use
Kodak to obtain the replacement parts and service.
Kodak eventually instituted a policy of selling the replacement parts only to
those buyers of Kodak equipment who purchased Kodak services to repair
their machines. Kodak tried to limit the access the ISOs had to replacement
parts for Kodak machines. This effectively limited the ability of the ISOs to
repair Kodak machines for their customers. A number of ISOs finally filed suit,
claiming that Kodak unlawfully tied the sale of service for Kodak machines to
the sale of parts.

A2 and A3 Thus, the tying arrangement was allegedly between Kodak's

repair service and its parts.

A4 In Kodak, the issue was whether Kodak had sufficient economic power in the tying product
market (for Kodak parts) to appreciably restrain competition in the tied product market (Kodak
service). Kodak claimed that while it might have a monopoly share of the parts market, it could
not actually exercise market power because there was competition in the equipment market, the
primary market. Thus, Kodak argued that its lack of market power in the primary equipment
market precluded a finding that it had power in a derivative aftermarket, i.e., the market for
services for that equipment. The Court rejected this presumption, finding no basic economic
reality which dictates that competition in the equipment market cannot coexist with market
power in the derivative aftermarket.
Instead, the Court adopted the reasoning of the ISOs, that there were significant information
and switching costs that would affect the behavior of consumers seeking to purchase either
equipment or services. For example, there is an information cost that purchasers must
understand when they purchase the equipment. In order for consumers to fully consider their
servicing needs, they must be able to engage in "lifecycle" pricing, or pricing that takes into
account not only the initial cost of the equipment, but also the costs of services needed after the
purchase. Likewise, switching costs also affect the market. Consumers who have already
purchased one type of equipment are more likely to accept an increase in price for the servicing
of that equipment before they will switch to another piece of equipment. Under Kodak, then,
market imperfections -- or "market realities" as the Supreme Court called them -- can provide
the necessary economic power in the tying market required for a per se tying violation.