An Economic Analysis of Tie-In Sales: Re-Examining the Leverage Theory
The seller of one good, with market power in that good, often chooses to require that a buyer purchase from him all of his requirements for some second good. The first good is commonly called the tying good, and the second good (that the purchaser is required to buy from him to get the tying good) is called the tied good. American law has been quite hostile to tie-ins, fearing that a monopolist may be able to extend his monopoly into another market.1 Economists have offered other explanations for this practice, although none is definitive. These explanations include evasion of government price controls,2 charging customers who use the tying good more intensely a higher price by exploiting the tied good as a metering device,3 raising profits when various customers value the two goods differently ("price discrimination"),4 preventing customers from substituting a less expensive good for the high-priced tying good,5 and risk sharing.6 This note reviews the historical developments of tying law and examines each of these explanations using economic theory. The analysis focuses on social welfare as defined by economists.7 It does not examine other rationales for forbidding tie-in sales such as protection of competitors, distaste for price discrimination, or a public