The Limits of Tying

by on August 16, 2006 at 6:24 am in Economics | Permalink

A pen may refuse to dispense ink unless it’s being used with licensed
paper. … A shoe may refuse to provide some features, such as high-tech
cushioning of the sole, unless used with licensed shoelaces. …Will
these things actually happen? I can’t say for sure.

So writes Felten, channeled through CrookedTimber.  This world sounds like fun, but it is unlikely to come about.  Most people wouldn’t buy a pen like that, and even a monopolistic pen supplier (hardly the case) would maximize profit by offering a more valuable product.  Tying has three primary rationales:

1. The main product actually works better with certain accompaniments.  The supplier wishes to either avoid complaints, liability, or damage to reputation.  Your local Denny’s won’t mash together french fries, blueberries, and coffee for you.  Not even if you beg, offer a large tip, or whine about "Markets in Everything."

2. Price discrimination.  Make them buy the printer with a specified printer cartridge.  People who use the printer more need more cartridges.  Under certain conditions, the cartridge can be priced so as to charge the high-value users more for the entire package.  That leads to higher profits than charging everyone the same price, at least if the right conditions are satisfied.  This is usually welfare-improving, I might add, as it leads to higher output.

3. Desire to use one monopoly position to take over another newly opened, declining-cost market.  Tying can give you a first-mover advantage and discourage entrants.  The model here is complicated but it can work out to support this result.  Try this one too, and here.  The iTunes case may be an example here.  Apple wants market power in both the on-line songs and the hardware market, and thinks it can leverage one into the other.  But notice that both markets must be susceptible to monopolization on the cost side, namely the presence of increasing returns for the first and dominant supplier.

In any case, I doubt if iTunes (as we know it) will be the industry standard ten years from now.  And if so?  "Let them listen to Cake!" I am willing to say.

The bottom line: Our pens and paper are safe.

1 Sandy Smith August 16, 2006 at 8:54 am

Inkjet printers? Almost anything Microsoft has ever done?

2 Darin London August 16, 2006 at 11:22 am

What about tying genetically modified plants with certain performance enhancing substances, which, of course, only work with the seeds made by the same company.

3 tylerh August 16, 2006 at 2:37 pm

Your local Denny’s won’t mash together french fries, blueberries, and coffee for you. Not even if you beg, offer a large tip, or whine about “Markets in Everything.”

FALSE. This would seem to be the leading explanation for the last plate I was served at Denny’s.

4 Will Hutchinson August 17, 2006 at 8:03 pm

While tying is not a guarentee of bad things, I don’t think the pen and paper example is a particularly good way of arguing that it never does cause these bad things.

The two considerations that I think are missing:
– Tying in a way that hurts consumers and causes pricing that is not overall best for the market is more likely to happen with new technology where the product being tied in is the first in its class. People wouldn’t buy a pen that didn’t work with all paper because they are used to all pens working with all paper. But those same people will put up with tying in new technologies because they are not used to having any alternatives.

– Patents can magnify monopolistic problems as when one of side of the tying is protected under a patent. For instance, if one company held the patent for the pen (the patent of course covering any “friction-based ink application device intended for use as a writing or marking instrument”) and then tied it to only their paper, then competing paper manufacturers who were only compatible with the older pencil technology would be at a competative disadvantage. Of course, this may be more of a problem with the patent system than the concept of tying, but if you take the current patent system as a given, then tying becomes more problematic.

5 nick August 19, 2006 at 11:33 pm

Felten seems to have redubbed smart contracts “PRM,” at least
when used for the purposes of tying. I’m sympathetic to both smart
contracts and freedom to tinker. See my response.

Comments on this entry are closed.

Previous post:

Next post: