Tying and Intellectual Property
| Author | Edward M. Iacobucci and Ralph A. Winter |
| Pages | 165-225 |
165
chapter 2
Tying and Intellectual Property
Edward M. Iacobucci and Ralph A. Winter1
A. INTRODUCTION: SETTING THE STAGE
1) What Is Tying?
Tying, or tied sel ling, is a rest riction placed by a multi-product seller
whereby t he terms of the purchase of one product are conditioned
on the purchase of another. In perhaps no other area of competition
policy is there greater dispute over t he appropriate legal ru le as to
when a practice should be prohibited. e ana lysis and development
of optimal competition policy towards t ying is especially challenging
in the area of intellectual property where the complexities of innova-
tion incentives and rapidly evolving technology are at play.
is chapter surveys the economics of tying in the area of intel-
lectual property, with the a im of contributing to optimal competition
policy. We begin in this introduction by deli neating more precisely
the t ypes of practices that competition law and analysts descr ibe by
the terms “tying” or “tied sales” and then providing an overview of
Edward Iacobucci is a Professor at the Faculty of Law, University of Toronto,
and Ralph Winter is a Professor at the Sauder School of Business, University of
British Columbia. e aut hors would like to thank Marcel B oyer, Tim Brennan,
France Chevalier, Richard Corley, Alan Gunderson, Randall Hofley, David Vaver,
Michael Trebilcock, and Deni s Wong for helpful comments on pr ior drafts.
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the market contexts and cases in which tying is observed. We focus in
this chapter on the role of intellectual property in relation to tying, al-
though the general theory of ty ing incentives is essential to an under-
standing of the issues when intellectual property (IP) is involved. In
this introduction, we also set out the criteria that we use to discuss an
optimal competition policy towards ty ing.
e concept of tying can be refined a long three dimensions. e
first import ant distinction is requirements tying versus bundling. Re-
quirements tying is the restriction imposed by a seller that to buy one
of its products, A, a buyer must purchase all of its requirements of an-
other product, B, from the seller. In other words, the right to purchase
product A carries w ith it an obligation not to purchase the product B
(or close substitutes) from any other seller. is restriction is one of
exclusivity. Examples of requirements contracting include the restric-
tion that a franchisee purchase its i nputs only from the franchisor;
the classic example of the restrict ion imposed by IBM that buyers of
IBM adding machines buy all of their requirements of punch ca rds
from IBM; and the restriction that buyers of photocopiers purchase all
toner or service from the same company.
A bundling restriction, on the other hand, requires a buyer to pur-
chase two goods, A and B, i n fixed proportions (for example, one unit
of B must be purchased with each unit of A). Along with this strategy
of “pure bundling” is the strategy of “mixed bundling” in which buyers
can purchase individual products separately but al so have an option
to purchase them together. Pure bundling is observed when left and
right shoes are sold together, when cars a re sold only with tires, or
(an obviously more contentious example) when purchasers of Micro-
soft’s operating system obtain t he Microsoft’s Windows Media Player
in the operating system package. Mixed bundling is practised by Mc-
Donald’s restaurants in offering the option of meal packages that are
priced lower than the sum of individual components of the packages.
In requirements contract ing, the primary good is often referred
to as the “tying good,” and the good whose purchase from other firms
See for example, Siegel v. Chicken D elight, F.d (th Cir. ) [Chicken
Delight].
See for example, Directo r of Investigation and Research v. Xerox (Canad a) Inc.,
CT--.
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is restricted as the “tied good.” In mixed bundling strategies where a
good B is offered alone as an option, but must be purchased by all buy-
ers of good A, good A is called the tying product and good B the tied
product.
e second important d imension in defining tying strategies is
in technological tyi ng versus contractual tying. Technological ty ing
occurs in the bundling context when two products that could feas-
ibly be offered as separate products are bundled together in a way that
makes it technologically impossible for consumers to purchase one
component but not the other. Soft ware is again a source of examples
of this type of tying. In the requi rements tying context, as opposed to
bundling, technological tying refers to the design of a primary good
(e.g., an in kjet printer) for which the only compatible variable i nputs
(the toners) are those produced by the seller. Contractual tying occurs
when a firm bundles two distinct products together in the package
sold to consumers, or where a firm prohibits the purchase of a variable
input from another seller as a condition of the purchase of a piece of
equipment.
e distinction between technological tying and contractual tying
is important in two respects. First, as a policy matter contractual tyi ng
may be ea sy to prohibit, whereas the prohibition of technological t y-
ing in any part icular case may require the feasibility of disassembling
an integrated product. Second, technological ty ing may in some cir-
cumstances be invoked by a dominant seller as a commitment aga inst
“undoing” the strategy, whereas such a commitment is more difficult
with contractual tying. is commitment may be needed when tying
is used as a strategy to deter entry. A well-established principle in eco-
nomics is that the credibility of entry-deterrence strategies depends
on commitment of the incumbent. And the commitment may be im-
portant not just in affecting a potentia l entrant’s actions but also vis-
à-vis the policy-maker, who may be able to undo a contractual tie but
not a technological tie.
e third di mension along which t ying strategies may vary is the
size of the price discount offered to the buyer accepting tying. A strat-
egy of offering buyers a percent discount on the primary product if
they agree to the exclusive purchase of the complementary product,
or a (mixed bundling) strategy of offeri ng a discount of percent on
a bundle if it is purchased a s a bundle, is a weaker form of tying than
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