Bundling, Tying, Metering. Economics

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Bundling, Tying, Metering.Economics Antitrust
Lecture 1

• Antonio Nicita
• Siena Doctorate in LE

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Bundling what and why?

• A bundle of two products is effectively a way of
  offering discount to customers who buy one of
  your product, since customers can buy the other
  product at a lower price than the stand-alone
  price.
• Do you want to offer a discount on the other
  product to customers who buy one product?
• Why?
• Price discrimination/efficiency

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Tie-in

• Tied Sales Tying is the practice of requiring
  the purchaser of one product to also purchase a
  second product.
• In the static tied-sale, the customer who wants
  to buy A must also buy B. It is possible to buy B
  without A which explains why this is a tie and
  not a bundle. Thus, the items for sale are B
  alone or an A-B package.
• There are many legitimate reasons why firms
  resort to tied sales. One motivation that leads
  to an antitrust concern is when the tied sale is
  used as a metering device to facilitate price
  discrimination.
• what is the appropriateness of direct price
  discrimination done through metering, without the
  use of a tied sale?

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Metering

• Metering is a form of pricing where the customer
  pays a per-use fee.
• Examples include paying a per-page fee for
  photocopying, a per-nail fee for a nail gun, a
  per-hour-of-use fee for an aircraft engine (often
  called power-by-the-hour), or even a per-mile
  fee for auto insurance.
• a distinction between (i) metering and (ii) tying
  that is used as a metering device. To illustrate
  this distinction, a photocopy machine seller
  could achieve a metered price result in two ways
  It could require that the customer purchase its
  paper at an inflated price (tying). It could
  charge a price per copy and allow the customer to
  purchase any paper on the market (pure metering).
• Although the two approaches have the same impact
  on the customer, they may have a different impact
  on the market and, thus, we may want to treat
  them differently.

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Bundling with Negative Correlated Preferences
Word Excel
A 12 3
B 10 4

• Selling separately
• Px10, Rev20
• Py3 , Rev6
• TR26
• Sell as bundle
• Pb14, TR14228
• Bundling is profitable in this case

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Bundling with Positive Correlated Preferences

• Selling separately
• Px10, Rev20
• Py3 , Rev6
• TR26
• Sell as bundlePb13, TR13226
• No difference!

Word Excel
A 12 4
B 10 3
7

• The willingness to pay for the bundle is less
  dispersed than the willingness to pay for the
  components. This will happen when the consumers
  with a high value for one component tend to have
  low value for another component

Consumption decisions when products are sold
separately
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Consumption decisions when products are sold as a
bundle
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Mixed bundling
Cost of X20 Cost of Y30

• Selling as mixed bundling
• PxPy89.99Pb100
• In this case
• A will buy Y only
• B C will buy bundle
• D will buy X only
• TR(89-30)(100-50)2(89-20)228

• Selling separately
• Px50, Rev(50-20)390
• Py90, Rev(90-30)160
• TR9060150
• Selling as pure bundle
• Pb100, TR(100-50)4200

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Asymmetric Mixed Bundling (with Tying)



                                                              
 
   
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Tying Bundling
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Bundling and Antitrust/1

• Chicago Critique bundling as leveraging?
  Leveraging Market Power. Firms may use their
  market power in one market to leverage it towards
  another.
• Bork (1978)you cannot raise more than one
  monopoly profit each time
• Assumptions perfect competitive market for
  bundled product static environment
• Double marginalization in monopolistic and
  oligopolistic environment efficiency reasons

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Bundling Antitrust/2 (Nalebuff)

• The creation of artificial scale economies.
  Absent bundling, a firm with larger scale or
  scope would not have an advantage over smaller
  rivals or entrants. However, the firm employs
  bundling to artificially create such scale and
  scope economies. A firm with power in several
  markets can use various bundling strategies to
  preserve and protect that market power. We
  illustrate this using examples from mobile phone
  pricing and airline pricing of roundtrip
  discounts.
• Raising Rivals Costs. Bundling and/or tying can
  be used to deny a rival or potential entrant
  access to a complementary market. For example, if
  bundling leads to the disappearance of an
  independent service market, then a potential
  entrant will have to enter with both a product
  and a service network. Cases in this report that
  illustrate this issue include Kodak,
  Guinness/Grand Met and SMG radio.

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Bundling Antitrust/3

• Lowering Rivals Benefits. Parallel to the effect
  of raising rivals costs is a move that lowers
  the benefits that consumers anticipate from
  rivals products.
• Efficiency Offence. In this case, bundling is
  used to mitigate what would otherwise be
  inefficiencies in pricing (such as double
  marginalisation). As a result, the bundling firm
  can gain a competitive advantage over rivals.
• Anti-competitive leveraging. While the Chicago
  School has discredited the static theory of
  market leverage, there are reasons to believe
  that a firm can use leverage to gain a dynamic
  advantage.

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Bundling Antitrust/4

• Bundling to Protect Market Power. When an
  incumbent has market power in several goods, it
  can use bundling as a way to reduce the
  likelihood and/or mitigate the potential cost of
  entry to the incumbent. Bundling may also be
  effective in deterring entry.
• It reduces the expected profits to an entrant
  against an incumbent that might be slow to
  respond (or that might be thought to be slow to
  respond).
• The intuition for this effect is that
  bundling restricts the entrant to go after the
  more limited market of customers that like its
  one product and do not care for the other
  products in the bundle.

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Bundling Antitrust/5

1. Bundling as a Commitment Device to Deter Entry.
   The first strategic theory of bundling explained
   how this strategy can be used to help a
   multi-product firm commit to taking a more
   aggressive stance towards rivals. In this
   context, bundling can also lead to advantageous
   RD incentives. However, the conclusion is
   premised on a firms ability to commit to a
   bundling strategy. Commitment is required as a
   firm would seek to abandon bundling in response
   to entry. This theory has not been connected to
   specific firm practices and, thus, remains more
   speculative, for now.
2. Hidden Pricing. Bundling can also be used to
   obscure pricing. We believe these types of
   problems can be solved through remedies such as
   those provided in the travel agent insurance
   case.These issues are more in the realm of
   consumer protection than in antitrust. In some
   cases, however, the form of the bundled pricing
   contract distorts the nature of price competition
   to the point where there are large
   cross-subsidies and even potential entry
   barriers.

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Discrimination Antitrust

• Is discrimination pro either anti-competitive?
• PRO efficiency increase (static environment)
• ANTI when efficient entry is inhibited (dynamic
  environment, network effects, one stop shop,
  standard)
• Whos welfare?

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US vs Microsoft/1 (D. Diermeier)

• In 1997 the U.S. Department of Justice (DOJ)
  files a civil antitrust case against Microsoft
• Initially the case was limited to a violation of
  the 1994 Consent Agreement between DOJ and
  Microsoft , but later broadened
• DOJs case was based on section 1 and 2 of the
  Sherman Act.
• Section 1 prohibits tying (usually a per se
  violation) provided that tying (i.e. Windows) and
  tied (i.e. browser) products are separate
  products
• The party imposing the tie has enough market
  power in the tying product market to force the
  purchase of the tied product.
• A not insubstantial amount of commerce in the
  tied product is affected.
• Section 2 prohibits unlawful monopoly. The DOJ
  must show that Microsoft has monopoly power, and
  that
• Microsoft willfully acquired or maintained power
  through anticompetitive acts.
• A complicating issue is the aspect of
  leveraging (just getting a better competitive
  position is not sufficient for a violation)

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US vs Microsoft/2

• In the Fall of 1999, Judge Jackson issued his
  Rulings of Fact
• damaging findings and harsh condemnation of
  Microsoft
• among other things Microsoft is found a monopoly
  - may lead to private anti-trust suits
• Rulings of Fact are hard to overturn on appeal
• Microsofts stock-price hardly moved
• In June 2000, Judge Jackson approves the
  submitted remedies by DOJ and state attorney
  generals
• Main proposal is to break up Microsoft into two
  companies (operating system and everything else)
  plus temporary conduct remedies
• Microsoft vows to fight on without any admission
  of guilt.
• Files appeal

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US vs Microsoft/3

• In 2001, U.S. Court of Appeals issued the
  following findings
• Monopoly finding in operating system market
  upheld
• No monopoly finding in the browser market
• Returned the issue of tying to the District
  Court changing the legal standard to be applied
  (no discussion of the merits)
• From per se to rule of reason
• Disqualified trial judge for interviews with
  media and offensive comments about MS
• the Court of Appeal held that these comments did
  not affect the judges finding of fact or
  conclusions of law.

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US vs Microsoft/4

• On September 6, 2001, the DOJ announced
• The DOJ was no longer seeking a breakup of
  Microsoft and
• The DOJ was no longer pursuing its tying claim
  against Microsoft (the strongest claim and most
  concerning to competitors)
• On November 1, 2001, the DOJ announced that it
  had reached a settlement with Microsoft.
• On November 6, 2001, nine states (including
  Connecticut, California, and Utah) reject the
  DOJ-MS agreement
• On November 1, 2002 the new district court judge
  Colleen Kollar-Kotelly upholds the settlement
  (except for minor changes)
• Microsoft has already complied with the 2001
  settlement
• Microsoft immediately implements minor changes
  required by judge

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EU vs Microsoft/1

• In December 1998, Sun Microsystems, another US
  company, complained that Microsoft had refused to
  provide interface information necessary for Sun
  to be able to develop products that would "talk"
  properly with the ubiquitous Windows PCs, and
  hence be able to compete on an equal footing in
  the market for work group server operating
  systems.
• The Commission's investigation revealed that Sun
  was not the only company that had been refused
  this information, and that these non-disclosures
  by Microsoft were part of a broader strategy
  designed to shut competitors out of the market.
• As a result, an overwhelming majority of
  customers informed the Commission that
  Microsoft's non-disclosure of interface
  information artificially altered their choice in
  favour of Microsoft's server products. Survey
  responses submitted by Microsoft itself confirmed
  the link between the interoperability advantage
  that Microsoft reserved for itself and its
  growing market shares.

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EU vs Microsoft/2

• In 2000, the Commission enlarged its
  investigation, on its own initiative, to study
  the effects of the tying of Microsoft's Windows
  Media Player with the company's Windows 2000 PC
  operating system.
• This part of the investigation concluded that the
  ubiquity which was immediately afforded to WMP as
  a result of it being tied with the Windows PC OS
  artificially reduces the incentives of music,
  film and other media companies, as well software
  developers and content providers to develop their
  offerings to competing media players.
• As a result, Microsoft's tying of its media
  player product has the effect of foreclosing the
  market to competitors, and hence ultimately
  reducing consumer choice, since competing
  products are set at a disadvantage which is not
  related to their price or quality.

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EU vs Microsoft/3

• Available data already show a clear trend in
  favour of WMP and Windows Media technology.
  Absent intervention from the Commission, the
  tying of WMP with Windows is likely to make the
  market "tip" definitively in Microsoft's favour.
  This would allow Microsoft to control related
  markets in the digital media sector, such as
  encoding technology, software for broadcasting of
  music over the Internet and digital rights
  management etc.
• More generally, the Commission is concerned that
  Microsoft's tying of WMP is an example of a more
  general business model which, given Microsoft's
  virtual monopoly in PC operating systems, deters
  innovation and reduces consumer choice in any
  technologies which Microsoft could conceivably
  take interest in and tie with Windows in the
  future.

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EU vs Microsoft/4

• In March 2004, The European Commission has
  concluded, after a five-year investigation, that
  Microsoft Corporation broke European Union
  competition law by leveraging its near monopoly
  in the market for PC operating systems (OS) onto
  the markets for work group server operating
  systems and for media players
• Because the illegal behaviour is still ongoing,
  the Commission has ordered Microsoft to disclose
  to competitors, within 120 days, the interfaces
  required for their products to be able to 'talk'
  with the ubiquitous Windows OS.
• Microsoft is also required, within 90 days, to
  offer a version of its Windows OS without Windows
  Media Player to PC manufacturers (or when selling
  directly to end users). In addition, Microsoft is
  fined 497 million for abusing its market power
  in the EU.

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EU vs Microsoft/5

• Microsoft abused its market power by deliberately
  restricting interoperability between Windows PCs
  and non-Microsoft work group servers, and by
  tying its Windows Media Player (WMP), a product
  where it faced competition, with its ubiquitous
  Windows operating system.
• This illegal conduct has enabled Microsoft to
  acquire a dominant position in the market for
  work group server operating systems, which are at
  the heart of corporate IT networks, and risks
  eliminating competition altogether in that
  market. In addition, Microsoft's conduct has
  significantly weakened competition on the media
  player market.
• The ongoing abuses act as a brake on innovation
  and harm the competitive process and consumers,
  who ultimately end up with less choice and facing
  higher prices.
• For these very serious abuses, which have been
  ongoing for five and a half years, the Commission
  has imposed a fine of 497.2 million.

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EU vs Microsoft - Remedies/1

• As regards interoperability, Microsoft is
  required, within 120 days, to disclose complete
  and accurate interface documentation which would
  allow non-Microsoft work group servers to achieve
  full interoperability with Windows PCs and
  servers.
• This will enable rival vendors to develop
  products that can compete on a level playing
  field in the work group server operating system
  market. The disclosed information will have to be
  updated each time Microsoft brings to the market
  new versions of its relevant products.
• To the extent that any of this interface
  information might be protected by intellectual
  property in the European Economic Area, Microsoft
  would be entitled to reasonable remuneration. The
  disclosure order concerns the interface
  documentation only, and not the Windows source
  code, as this is not necessary to achieve the
  development of interoperable products.

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EU vs Microsoft - Remedies/2

• As regards tying, Microsoft is required, within
  90 days, to offer to PC manufacturers a version
  of its Windows client PC operating system without
  WMP.
• The un-tying remedy does not mean that consumers
  will obtain PCs and operating systems without
  media players. Most consumers purchase a PC from
  a PC manufacturer which has already put together
  on their behalf a bundle of an operating system
  and a media player. As a result of the
  Commission's remedy, the configuration of such
  bundles will reflect what consumers want, and not
  what Microsoft imposes.
• Microsoft retains the right to offer a version of
  its Windows client PC operating system product
  with WMP. However, Microsoft must refrain from
  using any commercial, technological or
  contractual terms that would have the effect of
  rendering the unbundled version of Windows less
  attractive or performing. In particular, it must
  not give PC manufacturers a discount conditional
  on their buying Windows together with WMP.

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ConclusionsAntitrust assessment of bundling
PLUS FACTOR MINUS FACTOR
A firm has market power in two or more goods. Bundling to Avoid Double Marginalisation Bundling Complements to Undercut Rivals Bundling to Create an Entry Barrier Bundling to Gain Competitive Advantage Bundling to Deny Network Effects/Scale economies to Entrants Bundling and RD Incentives A firm has market power in one good Bundling to Mitigate Competition Firms charge a single price in the market Bundling to Reduce Pricing Inefficiencies (i) Bundling as a Price Discrimination Device (ii) Bundling to Reduce Double Marginalisation Customers have dispersed product valuations See Bundling to Reduce Pricing Inefficiencies (i) Bundling as a Price Discrimination Device (ii) Bundling to Reduce Double Marginalisation Customers value variety Bundling to Gain Competitive Advantage Goods A and B have low or zero marginal costs Most relevant when goods are not complements or highly correlated in value. Goods A and B are complements Bundling to Reduce Double Marginalisation Bundling to Create an Entry Barrier Technical Bundling The complements market has economies of scale or network effects Bundling to Create Network Externalities (i) Deny Network Effects / Scale Economies to Entrants One of the goods is competitively supplied Market power is protected by patent Firms can engage in price discrimination Customers have homogenous product valuations Customers do not value variety Goods A or B have high marginal cost Goods A and B are substitutes
See Nalebuff 2003