Why Do Firms Bundle and Tie? Evidence from Competitive Markets and Implications for Tying Law

Abstract

Tying the sale of products that could be sold separately is common in competitive markets-from left and right shoes, to the sports and living sections of daily newspapers, to cars and radios. This paper presents a cost-based theory of tying in competitive markets and applies this theory to bundling and tying in pain relievers and cold medicines, foreign electrical plug adapters, and mid-sized automobile sedans. We show that product specific scale economies are needed to understand tying, yet these scale economies might be hard to detect. We draw two principal conclusions for tying law. First, the theoretical and empirical evidence of tying efficiencies supports abandoning per se treatment of tying. Second, the difficulties in documenting efficiencies, even when they are clearly present, suggests that the rule-of-reason approach to tying should not impose too high a burden on the defendant to prove efficiencies.