TYING AND BUNDLED DISCOUNTS: AN EQUILIBRIUM ANALYSIS OF ANTITRUST LIABILITY TESTS

Abstract

Courts have struggled with determining when bundled discounts constitute unlawfully anticompetitive behavior. The current circuit split reflects an absence of consensus. This lack of legal guidance creates uncertainty in the market, with firms being given inconsistent – and sometimes contradictory standards on how to avoid antitrust liability. For the most part, we consider a standard paradigm for analyzing bundled discounts. Suppose that there are two firms. Firm 1 produces a monopoly product, A, and also another product, B, which competes with another version of B produced by Firm 2. The concern is the extent to which the price paid for A is linked to the purchase of B from Firm 1: has the bundling resulted in anticompetitive conduct in violation of Section 2 of the Sherman Act? We analyze three main approaches: the discount attribution test, the Elhauge proposal, and the Profit Sacrifice Test. Each of these has received much recent discussion, but very little of the debate takes into account the effects of bundled discounts where all firms are setting prices that maximize profits, i.e. in equilibrium. . With homogeneous goods in the B market, the attribution test should be failed is all firms are maximizing profits. The Elhauge proposal makes sense with equilibrium prices in some types of markets, but not others. The profit sacrifice test turns out to be vacuous when applied to bundled discounts, since in equilibrium there turns out to be no profit sacrifice. i. We explore related issues with tying arrangements. * The John Michael Stuart Centennial Professor of Economics at the University of Texas at Austin. Ph.D. (Economics) Yale University; B.A. (Economics) Stanford University. The author thanks Keith Hylton, Padmanbhan Srinagesh, David Radlauer, Michael Doane and, especially, Einer Elhauge and Patrick Greenlee for helpful discussions on the issues herein and, most particularly, his wife for assistance and patience over many years. ** Competition Economics, LLC. B.S.E.E. Tufts University. *** Professor & Chair, Department of Business Law, California State University, Northridge. J.D., Boston University; B.A., University of California.