The Limits of Tying

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.


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