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    The practice of tying and bundling looked upon in the context of Competition Act, 2002.

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    The practice of tying and bundling looked upon in the context of Competition Act, 2002.

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    3 views5 pages

    Tying Bundling in The Context of The Competition Act

    Uploaded by

    Prasun Kumar
    The practice of tying and bundling looked upon in the context of Competition Act, 2002.

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    -The law extends Sub-section 4 of Se¢ Tying/Bundling in the Context of the Competition Act Amitabh Kumar* Tying or bundling occurs when a product is sold on the condition that another -| product must be bought too. While tying i a per se offence in the US under the Sherman Act, it is an abuse of dominance uder Article 82 in the EU The Competition Act, 2002 also recognizes tying as an offence, but asa vertical restraint ratherthin unilateral conduct. Thus, the Indian law creates a unique position for itself. This article also deals with the types of tying and its effect on the Market. Current economic thinking on the subject suggests that tying is pro-competitive, pt inn certain circumstances. Tying or bundling is a specific offence in | before an act of tying can be declared the Competition Act, 2002 (referred | anti-competitive or to have an hereinafter, as CAQ2). The expression | appreciable adverse effect. on used in the law is “tie-in arrangement”, | competition, in terms of the language of which is defined to include any | the law.CA02 further provides six factors agreement requiring purchase of goods, | for consideration of the competition as a condition of purchase, to purchase | authority before coming to any some other goods (see Explanation to | conclusion (see Section 19(3)). Three of Section 3(4)). Section 3 of CA02 deals with | these factors are indicative of the harm anti-competitive agreements. There are | to competition while the remaining six two important issues to be noted at this | are pro-competitive and enhance stage, welfare. The scheme of the law is clearly (i) That tying is not an infringement of | for application of the Rule of Reason test. Section 4, i.e. it is not an abuse of | In the US, Section 2 of the Sherman Act dominant position in the Indian law. | makes tying an offence. Section 2 states (ii) That the definition excludes | “Every person who shall monopolise, or services since the word “goods” is | attempt to monopolise, or combine or explicitly defined in Section 2(7 conspire with any other person or persons, to monopolise any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.” The Clayton Act also makes it an offence. In both these laws, tying is an abuse of dominance. The position is no different in the EU. Article 82 (d) prohibits the abuse of ion * of the CA02 to vertical agreements by the usage of the expression “agreement amongst ...at different stages or levels of the production chain in different markets...” Vertical restraints are subject to the Rule of Reason test. So, the benefits and the harm have to be weighed 4 : B-148 Apr. 2010 - Jun. 2010 2010] Tying/Bundling in the Cou “making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contract”, By making tying as an anti-competitive vertical restraint, the Indian law creates a unique position for itself Tying or bundling occurs when a product is sold on the condition that another product must be bought too, The primary product is called the tying product and the secondary product is called the tied product. Tying can be physical or it can be contractual. Physical tying occurs when two products are available in the market n an integrated form such that it is not possible to detach them, An example is a quartz watch that comes with a button battery cell. Although it is possible to sell the watch and the battery cell separately, consumers take them bundled because ‘one cannot be used without the other. Contractual tying means making a consumer contract for the tied product. The two products. can be complementary, but need not be. IBM contracted with its customers to purchase data cards only from it. The two products may be quite different and yet a contractual obligation can be imposed | to buy both. Contractual tying can be either positive tying, with obligation to buy the secondary product from the seller alone, or negative tying, with obligation | not to buy secondary product froma third | party. | The tied product is usually a/ complementary product. Ina market with | high degree of innovation, physical tying | is likely to be the norm. Otherwise, | text of the Competition Act B-149 contractual tying will be the preferred route. In the absence of market power, itis highly unlikely that tying would be successful Market power is the ability of a firm to raise price or reduce supply or both independently of its competitors and customers. {f a firm with little or insignificant market power was to attempt tying, customers will simply switch to its competitors. The potential loss of revenue and consequential Jower profits will deter a firm without market power to get into a tie-in arrangement, Whish! (2009) says that “Vertical agreements are likely to have an effect on competition only where the firm imposing a vertical restraint already has market power”, ina recent atticle, “Tying: A Poster Child for Antitrust Modernization”, Evans (2005)? has argued that there is no economic rationale for treating tying per se harmiful. While a host of practices like predatory pricing are tried under the Rule of Reason test, tying continues to be a per se offence in the US. In fact, the US Supreme Court came close to relegating this practice to a less rigorous rule of reason in the Jefferson Parish Hospital case, but hesitated to bury decades of precedence. The Jefferson Parish Hospital had an arrangement with a firm of anaesthetists who alone could provide services in the hospital. The Court, with a five-four majority held that tying was not restricting trade since patients had choice of hospitals and also because the hospital had to ensure certain level of competence and expertise, The. US Supreme Court laid down certain requirements for indictment on grounds of harmful tying: 1 Whish, Richard (2009) Competition Law, Oxford University Press, London, Sixth Edition, page 613 Evans, David S., Tyi Available at SSRN: htt 3. Jefferson Parish Hospital Dis The Poster Chi trict No 2 v, Edw Apr. 2010 - Jun. 2010 | tor Antitrust Modernization (November 2005). /ssrn.com /abstract=863031 vin G, Hyde 406 US 2 (1984) 1. There must be two separate products or services. 2. There must be a,sale or an agreement to sell one product (or service).on the condition that the buyer purchases another product or service (or the buyer agrees not to purchase the product or service from another supplier) The seller must have sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product, 4. The tying arrangement must affect a “not insubstantial” amount of commerce, we In fact, the Supreme Court is not alone in moving away from per se condemnation of the practice of tying on grounds of its pro-competitive effects. The Chicago schoot had for long argued that tying is pro-competitive and that a monopolist has no incentive given the fact that it cannot increase its profit beyond monopoly levels. The argument, simply put, is that a monopolist maximises its profit in the market for primary good and cannot exceed it even if it tries to monopolise the market for the tied product. This argument has been rebutted by Whinston* (1990), who has demonstrated that, under certain conditions (where constant retums to scale and competition are lacking in the tied good and where the tying good is not essential), a monopolist can indulge in the practice of tying either to safeguard his market power in the primary good or to extend it in the market for secondary Competition Law Reports [Vol.1 good. This argument has been tested and buttressed by Carlton and Waldman? (2005). In spite of some economic reason for tying available, all the experts unanimously recommend to. the competition authorities to apply rule of reason given the strong possibility of its pro-competitive effects. As stated above, a monopolist has little incentive for tying or bundling according. Monopoly profits do not necessarily get enhanced by tying. This was demonstrated by Whinston (1990) under most conditions. The situation alters when we look at market for a product in which innovation is the driving force so that frequent upgrades take place and the consumer faces substantial switching cost. In such a market, the monopolist may indulge in tying either to safeguard entry into the primary good market or to. extend its market power to the tied product market. All the celebrated cases involving tying have been under abuse of dominance provisions. The Microsoft case® in the US involved bundling of the Internet Explorer with Windows operating system, The Microsoft case,’ in the BU involved bundling of the Media Player with Windows. The GE/Honeywell case? in the EU revolved around the distinct possibility of tying (avionics with software). ‘The IBM case,’ in the US was about bundling of data cards with the counting machine. A common thread in all these case is the existence of significant market power in the primary product market and the monopolist not having the better tied product in the 4 Whinston (1990); Tying, Foreclosure and Exclusion; The American Economic Review (AER) 80(4), 837-59 5 Carlton, Dennis and Waldnian, Michael (2005); Theories of Tying and Implications for Antitrust, Johnson School Research paper Series No. 24-06 6 US v. Microsoft Corporation, 56F 3D 1448 (DC Circuit 1995) 2 Microsoft Corp «, Commission 1-201 /04 [2007] ECR 11-000, [2007] 5 CMLR 846 8 GE/Honeytwell T-210/01 [2005] ECR Il ~ 5575, [2006] 4 CMLR 686 9 International Busivess Machine Corporation v. US, 298 US 131 (1936) 116 ‘Apr. 2010 - Jun. 2010 2010} Tying/Bundling iz the Context of the Competition Act BAISI market. The firm charged with tying manufactured /provided both the tying as well as the tied product. There is no tying when a firm having substantial market power in the tying product has to sell a complementary product produced by another firm if it does not derive any benefit from the transaction. Even the DG, Competition, EU in its vertical guideline” recognises this. When the tied product does not give any financial benefit to the supplier of the tying product, the transaction may fall outside Article $1 (the rule regarding anti- competitive agreements in the EU, now numbered Article 103). ‘The moot question is how will the Indian law deal with tying? It is obvious that physical tying is out of its ambit since there is no agreement involved. Existence of an agreement is a sine qua non for invoking Section 3. Contractual tying can provide the jurisdiction for an inquiry under Section 3. I am not surprised with this. Physical tying takes place when the products can only be used together and in an integrated manner; for example, laptop and software. Contractual tying can be of unrelated products which the consumer may not even want. There is coercion involved in a contractual tying Chances of contractual tying having antitrust concerns are far higher than physical tying. The Indian law is in tune with the current thinking on tying in the sense it recognizes its pro-competitive effects by subjecting it to analysis by rule of reason, Given the ubiquity of bundled products in the market, it is hard to find fault with this approach. Most products are bundled. Evans (2005) puts it succinctly. “Most products are bundles of features that could be and sometimes are provided separately Consider a morning in the life of a typical consumer. Her alarm clock goes off-this might be a radio alarm clock or the one ‘on her mobile phone. From her doorstep, she gets the Washington Post, which includes national and international news, sports, perhaps local Virginia news, and arts. For breakfast, she has.a bowl of Apple Cinnamon Cheerios, though she has to add the milk herself. She turns her television on to watch CNN; she skips past House and Garden TV, which she must take as part of her cable package but never watches. Then she steps into her SUV and turns on the radio, which came with the car, and, if she does not know where she is going, perhaps even uses the built-in GPS navigation system. Bundling does not cease when she gets to her office. The building probably includes security services, cleaning, and other amenities. She boots up her computer, which is a bundle of an operating system, applications software, a computer chip, and perhaps a DVD player. Asa surgeon, her patients get a bundle of services from the hospital including nursing, anaesthesiologists, and meals” In view of this common business practice, The US Supreme Court created a test. There should be two distinct products, which can be distinguished by the character of demand. rather than functional relationship. Do the consumers want the two products together or separately? Until recently, a consumer preferred a camera, a phone, an alarm, a watch and a music player separately. Now, he/she wants all in one mobile handset. Charge of tying will lead to disastrous results for the consumers. The European Commission in its vertical guidelines defines distinct products by the demand of the buyers; whether buyers, in the absence of tying, purchased them on two different markets. Tying may become necessary in a nascent industry. Since a market is yet to 10 European Commission Guidelines on Vertical Restraints 2000 paragraphs 215-224 Apr. 2010 ~ Jun, 2010 17 Bas? Competition Law Reports [Vol.1 getestablished, tying may actually help. The fledgling industry defence was accepted in the early days of TY in the case

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