TYING IN AND ITS COMPLEXITIES

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THIS ARTICLE WAS WRITTEN BY NISHKA TYAGI, A STUDENT OF ILS LAW COLLEGE, PUNE.

“Tying” is a commercial practice whereby a seller makes the sale of a product, also called tying product, conditional upon the purchase of another product, called the tied product, from the same seller through a technical or contractual basis. A tying could be done essentially in two conditions that is when the buyer agrees: 1) to but the tied product or 2) not to buy it from any other supplier. Tying is a very common practice used by sellers in day to day businessfor the basic efficiencies it provides, some of them being reduction in distribution and transaction cost.It is used as a sale strategy adapted by companies to promote/ introduce a slow selling or unknown brand. So the question is when does such tying become anticompetitive and in some cases even abusive?

            Tying has both welfare enhancing as well as welfare decreasing effects. On one hand, it can often lead to efficiencies and on the other hand, these strategies can be used as a tool to discriminate on the basis of price and thusobtain consumer surplus more efficiently. Tying can be used as a strategy forforeclosing competitors and new entrants, both in the tied and the tying goods’ market. Previously tying in was considered illegal per say where the court claimed that “tying agreements serve hardly any purpose beyond the suppression of competition”. Market power or dominance has been a perquisite while considering tie in arrangements even though essentially tying in falls under section 3 and not section 4 of the Competition Act, 2002. Because through this power, comes the concept of leveraging such power.  Leveraging of power in simple term is when the seller sells products under the tie-in arrangement, where he has sufficient power over the tying product which he exploits to increase demand of the tied product by forcing customer to buy it and thus restrains free competition in the market for the tied product. What distinguished illegal tying from legal bundling was “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.[1]” When the buyer has a free choice of buying the tied product separately too, no tying occurs.Another important factor is separate products. If there is no separate demand for the tied product then the whole point of harming or foreclosing competition won’t exist as there essentially is no competition for the product. The Commission explains in the Guidance paper[2] that the distinction depends on customer demand and relies on a test which examines whether, without the tying and bundling, a substantial number of customers would still purchase the product from the same supplier.

            This per se approach towards tying was modified in the famous case of Jefferson Parish[3], where the Supreme Court tried distinguishing between good and bad tying and tried to develop a test and looking into possibility of efficiencies. Market power, separate products, efficiencies were the three top points that were analyzed in this case. They studied consumer benefits, share of such customers preferring such bundle, non-market power firms tying products and the tying and tied product being two separate products to understand the logic and explore something more than just per se illegality. This Jefferson Parish is still used in current cases as it gave a path that could be followed while looking into efficiencies. The Microsoft III[4] decision brought a widely acceptedrule of reason approach. It brought out the flaws in Jefferson case of not taking into consideration the Innovation and dynamic nature of products which essentially . Under the rule of reason approach, a factual analysis is conducted and the anti and pro-competitive effects of such tying are considered but this case a unique case that hadn’t been dealt before. It was a physical and technological tie of Microsoft and Internet Explorer.

            Thus tying in has gone through a lot of changes in the past years in order to make it as fair as possible. Under the Indian law, there is a long list of conditions that have to be considered while looking into anti-competitiveness under section 3 which are enumerated in section19(3) of the act which include foreclosure of competition, barriers to entry created for new entrants, accrual of benefits to consumers and more. It’s no longer black and white. Reliance on only market power is an approach that will penalize a perfectly legitimate conduct. Substitutability, interchangeability, dynamic nature and consumer demand of the product play an equally important role of the products also play a very important role in such cases. If the tied product is easily changeable or has similar substitutes then the chances of such tying effecting the competition are higher as they minimize consumer demand and thus competition for such substitutes. But if the product doesn’t have close substitutes and carries a unique quality then the chances of harming competition are quite low. In a fast changing or developing market, two separate product test is very questionable as very rightly put forth in the Microsoft III case:

“The direct consumer demand test focuses on historic consumer behavior, likely before [technological tying], and the industry custom test looks at firms that, unlike the [tying firm] may not have integrated the tying and the tied goods. Both tests compare incomparables–the [tying firm’s] decision to bundle in the presence of integration, on the one hand, and the consumer and competitor calculations in its absence, on the other.”

While considering abusive tying under section 4 of the competition act 2002, the presence of market power has to established through any or all of the points laid forth under section 19(4) of the Act which include market share of a firm, size and resources of enterprise and its competitors, commercial advantages and more. In recent judgements, market share alone as a factor hasn’t been considered to determine dominance so thus more factors have to be proved.

Tying in includes many efficiencies such as reduced production, distribution and transaction costs as it  may gives rise to economies of scale and scope in production and distribution. Another efficiency being product improvement as the tied products may provide for a better product as they would work more efficiently together and provide more benefits to the customer. For example a streaming device and a television set. Price efficiency is also increased especially if the goods are complementary products as the problem of double marginalization is covered through such tying.

Thus tying cannot be rejected as an anti-competitive or an abusive practice without goinginto the above mentioned intricate analysis.

[1]Jefferson Parish Hospital Dist. No. 2 et al. v. Hyde, 466 U.S. 2 (1984)

[2]Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, 2009/C 45/02, para. 51

[3]Jefferson Parish Hospital Dist. No. 2 et al. v. Hyde, 466 U.S. 2 (1984)

[4] United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) [hereinafter Microsoft III].