1. Class 13 Antitrust, Winter, 2018 Tying
9/19/2018
Class 13 Antitrust, Winter, Tying
Randal C. Picker
James Parker Hall Distinguished Service Professors of Law
The Law School
The University of Chicago
Copyright © Randal C. Picker. All Rights Reserved.

2. The Left Shoe Monopolist
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The Left Shoe Monopolist
Situation
M has a monopoly in the production of left shoes.
Marginal cost of making a left shoe is $1.
Anyone can produce right shoes at a marginal cost of $1.
Customers value pairs of shoes at $102.
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3. The Left Shoe Monopolist
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The Left Shoe Monopolist
What should our monopolist do?
Sell left shoes alone?
Offer both and let consumers choose?
Require consumers to buy both?
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4. Fixed Proportions and Tying
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Fixed Proportions and Tying
Don’t Need To Tie Shoes
M can extract the full monopoly profit by setting a price for left shoes of $101.
Absent a more sophisticated story, tying will not increase the profits of M in the fixed proportions case.
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5. September 19, 2018

6. September 19, 2018

7. Fixed v. Variable Proportions
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Fixed v. Variable Proportions
Variable Proportions Case
We cannot make a general statement about social welfare and tying in the variable proportions case.
Price discrimination through tying can either increase welfare or reduce it.
Fixed Proportions Case
Tying should not increase profits, so we should expect other motives to be at work.
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8. Metering and Tying Monopoly over Machine More than One Price
How do I exploit my monopoly power over the machine?
More than One Price
I would like to charge different customers different prices for the machine
How do I do that?
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9. Metering and Tying
No Desire as Such to Extend Monopoly (or Leverage Monopoly) to Second Good
Use Second Good to Create Multiple Prices for Monopolized Machine
With non-competitive price on consumable (punch card or salt) heavy users effectively pay more for machine
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10. Metering and Tying Technological Change and Metering
Much easier these days to assess use of machine directly and charge accordingly
Less reason to use consumables as counting mechanism
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11. Starting Point I Starting a New Hospital
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Starting Point I
Starting a New Hospital
Hospital advertises for new employees including anesthesiologists
Hires some, rejects others
Do the rejected have an antitrust claim? On what theory? Under Sec. 1? Sec. 2?
Is this different than Jefferson Parish?
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12. Starting Point II Selling Hotdogs
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Starting Point II
Selling Hotdogs
I set up a cart on 60th St. to sell hotdogs
I will only sell hotdogs and buns together; I never sell one without the other
Do customers have an antitrust claim? On what theory? Under Sec. 1? Sec. 2?
Is this different than Jefferson Parish?
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13. Jefferson Parish (US, 1984) Key Facts
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Jefferson Parish (US, 1984)
Key Facts
Exclusive contract for anesthesiological services between hospital and Roux and Assoc.
Hyde sought admission to staff of East Jefferson Hospital, and denied
Feb Contract
Signed before hospital opened
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14. 9/19/2018
Jefferson Parish
Roux could designate anesthesiologists for admission to EJH staff
EJH appointed nursing staff, subject to Roux approval
EJH would use Roux exclusively and vice versa
1976 Contract
Seemingly drops exclusivity on both sides but EJH remains exclusive
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15. Jefferson Parish Market Info 20 hospitals in New Orleans metro area
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Jefferson Parish
Market Info
20 hospitals in New Orleans metro area
70% of those in Jefferson Parish go to hospitals other than EJH
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16. What Does This Mean? Per the Court
“Thus, the law draws a distinction between the exploitation of market power by merely enhancing the price of the tying product, on the one hand, and by attempting to impose restraints on competition in the market for a tied product, on the other.”
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17. What Does This Mean? Per the Court
“When the seller’s power is just used to maximize its return in the tying product market, where presumably its product enjoys some justifiable advantage over its competitors, the competitive ideal of the Sherman Act is not necessarily compromised.”
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18. What Does This Mean? Per the Court
“But if that power is used to impair competition on the merits in another market, a potentially inferior product may be insulated from competitive pressures.”
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19. What Does This Mean? Per the Court
“This impairment could either harm existing competitors or create barriers to entry of new competitors in the market for the tied product, and can increase the social costs of market power by facilitating price discrimination, thereby increasing monopoly profits over what they would be absent the tie.”
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20. Tying Tests Power and Forcing
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Tying Tests
Power and Forcing
“[T]he essential characteristic of an invalid tying arrangement lies in the 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.”
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21. Tying Tests Per se illegal
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Tying Tests
Per se illegal
if “substantial volume of commerce is foreclosed thereby.”
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22. Separateness Tying requires two distinct products
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Separateness
Tying requires two distinct products
What makes for separate products?
Functional relation?
Do we ever see anesthesiological services purchased without a hospital operating room?
Character of demand?
Even if simultaneous use is inevitable, do consumers want to self-bundle?
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23. Test Separate Consumer Demand
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Test
Separate Consumer Demand
“Thus, in this case no tying arrangement can exist unless there is a sufficient demand for the purchase of anesthesiological services separate from hospital services to identify a distinct product market in which it is efficient to offer anesthesiological services separately from hospital services.”
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24. Kodak (US, 1992) Key Facts Kodak sells copying machines
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Kodak (US, 1992)
Key Facts
Kodak sells copying machines
Independent service organizations (ISOs) emerge to service machines using Kodak parts
Kodak restricts access to parts: get Kodak parts only if self-service or use Kodak service
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25. Defining Markets Two Markets? Original equipment market After-market
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Defining Markets
Two Markets?
Original equipment market
After-market
For parts and service
Kodak has 80 to 95% of the services market for Kodak copiers
Kodak has 100% of parts market for Kodak copiers
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26. Defining Markets The After-Market Parts are not interchangeable
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Defining Markets
The After-Market
Parts are not interchangeable
Separate markets for parts of each copier brand
Service may be interchangeable
The precise point of ISOs
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27. Fixed or Variable Proportions?
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Fixed or Variable Proportions?
How should this case be classified?
Tricky
Yes, consumers use different amounts of the after-market services/parts, so that is variable
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28. Fixed or Variable Proportions?
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Fixed or Variable Proportions?
But: tie is between parts and service and that is fixed proportions
Ask: couldn’t Kodak get full monopoly profits in the after-market just through setting the right price for parts?
Why does Kodak want to sell service if ISOs can do it at lower cost?
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29. Doing the Tying Analysis
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Doing the Tying Analysis
How should we evaluate separateness under Jefferson Parish
Self-Bundling
Again, even if used together functionally, consumers may want to self-bundle
Assessing Market Power
Does competition in the equipment market protect against monopoly power in the after-market?
Competing for exclusive relationship?
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30. Attempted Monopolization Claim
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Attempted Monopolization Claim
The Question
Turns completely on market definition
Kodak has 100% of parts market
Can a single brand be a market?
The Response
Brand consistency and responsibility confusion
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31. Attempted Monopolization Claim
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Attempted Monopolization Claim
Standard tying claim: set standards, don’t require just your parts
Barring free riding by ISOs
“This understanding of free-riding has no support in our case law. To the contrary, … one of the evils proscribed by the antitrust laws is the creation of entry barriers to potential competitors by requiring them to enter two markets simultaneously.”
September 19, 2018