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Slide 1

(Allegedly) Monopolizing Tying
Via
Product Innovation


Robert Willig
Princeton University
Compass


Slide 2

Tough to Assess Monopolization

  • Practices can harm competition and consumers by seriously weakening ability of rivals to compete effectively.
  • Practices can be good for consumers and be an intrinsic part of competition.
  • Innovation is particularly valuable to consumer welfare, and particularly vulnerable in its incentives.


Slide 3

Two Phases for Assessing
Monopolization

  • Has the challenged practice harmed competition (or is there a dangerous probability that it will)?
  • If the challenged practice has harmed competition,
    • is the practice part of competition?
    • does the practice "make economic sense?"
    • is there a sound business rationale?
    • OR, is the harm to competition "willful?" <as revealed by economic analysis, not subjective intent>
    • is there "sacrifice of profit?"


Slide 4

Harm to Competition
From the Tie?

  • Are consumers impelled to buy the tying good, and thus the tied good, by market power?
    • Highly limited substitutes for the tying good?
    • Highly limited substitutes for the tying-tied goods together?

  • Does the ensuing unavailability of the tied sales to rivals harm competition?


Slide 5

Harm to Competition
From the Tie?

  • Identify the relevant market and its participants.
  • Has the unavailability of the tied sales eliminated or significantly weakened rivals who are scarce and irreplaceable?
  • Loss of share or margins of rivals is Not Enough
  • Have the tying-tied sales been good deals?
  • Have prices gone up and alternatives degraded outside of the tying-tied products?
  • Is enough of the market unaffected by the tying for rivals to get needed scale economies from there?
  • Has rivals' R&D dried up due to loss of scale economies?
  • Were rivals inefficient and weakening anyway?


Slide 6

Is the Challenged Tie Part of
Competition?

  • Since competition is the valid policy goal, business conduct that is part of competition should not be held as monopolizing.
  • Would the challenged tie make business sense - be profitable - without taking into account any added monopoly power from weakening rivals?


Slide 7

Tying Via Product Innovation:
"Technological Tying"

  • New product design ties two components of a system that might otherwise be "open"
  • Potentially competitive component is thus technologically tied to bottleneck tying component.
  • Rivals are shutout of system, possibly creating market power over tied components in non-coincident markets, and possibly preserving bottleneck market power.
  • New product design may be a welfare-increasing innovation!


Slide 8

Diagram

[D]


Slide 9

Optimal Policy for Social Welfare

  • The "compensatory price" for the open-design bottleneck is defined as that which earns the same margin as the market price for the new system.
  • Theorem: With compensatory pricing of the open-design bottleneck, the technological tie can eliminate the competitors if and only if the new closed system is socially superior to the open one, ex-post the R&D costs.
    • Ordover and Willig, "An Economic Definition of Predation: Pricing and Product Innovation," Yale Law Journal, 1981.


Slide 10

Optimal Policy for Social Welfare
(continued)

  • Theorem: Taking into account the R&D costs, the new closed system is socially superior to the open one if and only if it raises profits for the innovator under compensatory pricing of the open-design bottleneck.
    • Ordover and Willig, "An Economic Definition of Predation: Pricing and Product Innovation," Yale Law Journal, 1981.


Slide 11

Optimal Policy for Social Welfare
(continued)

  • In other words, if a technological tie is accompanied by compensatory pricing of the open design, the theorem proves the new system is better if it profitably kills off the competitors.
  • If the open design is not preserved, but its compensatory pricing would not alter market outcomes, then the results of the theorem still apply.
  • If the technological tie kills off competitors, but the R&D and other costs are not worth the incremental net revenues but-for the monopolization, then social welfare is lowered by the new design.


Slide 12

Important Caveats

  • How can a fact-finder assess the expected R&D costs?
  • How can a fact-finder assess the impacts of the tie if there were (as a but-for) also an open system with compensatory pricing?
  • But, without this approach, how could a fact-finder assess whether the closed system design is socially superior to the hypothetical open one?


Slide 13

More Important Caveats

  • The theorems rely on a setting where there are no other issues for social welfare besides the possible monopolizing tie.
  • Economics teaches that innovation brings complicating ambiguous externalities:
    • Benefits to consumers and to imitators that the innovator cannot appropriate
    • Diversions of sales and profits from differentiated rival products

  • So it is unknown how competitive and technological tying conduct in an actual market compare to first-best innovation.


Slide 14

Policy Bottom Line

  • As a matter of economic logic, technological tying is a real possibility, and there may be genuine incentives to do so for pro or anti competitive reasons.
  • There are logical and intuitive tests and standards for assessing product design for monopolization via tying. These are tough to apply, so great humility is called for.
  • To protect innovation from stultifying litigation, strict and demanding hurdles should impose tough discipline on antitrust intervention vis technological tying.
    • See D. Gaynor's FTC working paper "Technological Tying" for a similar conclusion based on a price-discrimination model.