<< Chapter < Page Chapter >> Page >

Tying sales happen when a customer is required to buy one product only if the customer also buys a second product. Tying sales are controversial because they force consumers to purchase a product that they may not actually want or need. Further, the additional, required products are not necessarily advantageous to the customer. Suppose that to purchase a popular DVD, the store required that you also purchase a portable TV of a certain model. These products are only loosely related, thus there is no reason to make the purchase of one contingent on the other. Even if a customer was interested in a portable TV, the tying to a particular model prevents the customer from having the option of selecting one from the numerous types available in the market. A related, but not identical, concept is called bundling    , where two or more products are sold as one. Bundling typically offers an advantage for the consumer by allowing them to acquire multiple products or services for a better price. For example, several cable companies allow customers to buy products like cable, internet, and a phone line through a special price available through bundling. Customers are also welcome to purchase these products separately, but the price of bundling is usually more appealing.

In some cases, tying sales and bundling can be viewed as anticompetitive. However, in other cases they may be legal and even common. It is common for people to purchase season tickets to a sports team or a set of concerts so that they can be guaranteed tickets to the few contests or shows that are most popular and likely to sell out. Computer software manufacturers may often bundle together a number of different programs, even when the buyer wants only a few of the programs. Think about the software that is included in a new computer purchase, for example.

Recall from the chapter on Monopoly that predatory pricing    occurs when the existing firm (or firms) reacts to a new firm by dropping prices very low, until the new firm is driven out of the market, at which point the existing firm raises prices again. This pattern of pricing is aimed at deterring the entry of new firms into the market. But in practice, it can be hard to figure out when pricing should be considered predatory. Say that American Airlines is flying between two cities, and a new airline starts flying between the same two cities, at a lower price. If American Airlines cuts its price to match the new entrant, is this predatory pricing? Or is it just market competition at work? A commonly proposed rule is that if a firm is selling for less than its average variable cost—that is, at a price where it should be shutting down—then there is evidence for predatory pricing. But calculating in the real world what costs are variable and what costs are fixed is often not obvious, either.

The Microsoft antitrust case embodies many of these gray areas in restrictive practices, as the next Clear it Up shows.

Did microsoft ® Engage in anticompetitive and restrictive practices?

The most famous restrictive practices case of recent years was a series of lawsuits by the U.S. government against Microsoft—lawsuits that were encouraged by some of Microsoft’s competitors. All sides admitted that Microsoft’s Windows program had a near-monopoly position in the market for the software used in general computer operating systems. All sides agreed that the software had many satisfied customers. All sides agreed that the capabilities of computer software that was compatible with Windows—both software produced by Microsoft and that produced by other companies—had expanded dramatically in the 1990s. Having a monopoly    or a near-monopoly is not necessarily illegal in and of itself, but in cases where one company controls a great deal of the market, antitrust regulators look at any allegations of restrictive practices with special care.

The antitrust regulators argued that Microsoft had gone beyond profiting from its software innovations and its dominant position in the software market for operating systems, and had tried to use its market power in operating systems software to take over other parts of the software industry. For example, the government argued that Microsoft had engaged in an anticompetitive form of exclusive dealing by threatening computer makers that, if they did not leave another firm’s software off their machines (specifically, Netscape’s Internet browser), then Microsoft would not sell them its operating system software. Microsoft was accused by the government antitrust regulators of tying together its Windows operating system software, where it had a monopoly, with its Internet Explorer browser software, where it did not have a monopoly, and thus using this bundling as an anticompetitive tool. Microsoft was also accused of a form of predatory pricing; namely, giving away certain additional software products for free as part of Windows, as a way of driving out the competition from other makers of software.

In April 2000, a federal court held that Microsoft’s behavior had crossed the line into unfair competition, and recommended that the company be broken into two competing firms. However, that penalty was overturned on appeal, and in November 2002 Microsoft reached a settlement with the government that it would end its restrictive practices.

The concept of restrictive practices is continually evolving, as firms seek new ways to earn profits and government regulators define what is permissible and what is not. A situation where the law is evolving and changing is always somewhat troublesome, since laws are most useful and fair when firms know what they are in advance. In addition, since the law is open to interpretation, competitors who are losing out in the market can accuse successful firms of anticompetitive restrictive practices, and try to win through government regulation what they have failed to accomplish in the market. Officials at the Federal Trade Commission and the Department of Justice are, of course, aware of these issues, but there is no easy way to resolve them.

Key concepts and summary

Firms are blocked by antitrust authorities from openly colluding to form a cartel that will reduce output and raise prices. Companies sometimes attempt to find other ways around these restrictions and, consequently, many antitrust cases involve restrictive practices that can reduce competition in certain circumstances, like tie-in sales, bundling, and predatory pricing.

Questions & Answers

what is imperfect competition ?
SHAH Reply
the situation in which elements of monopoly ( R&D, EOS and stability of prices etc.) allow individual producers or consumers to exercise some control over market prices
Ghulam
how to find shut down
Sowmya Reply
where p is less than avc
Koushik
s
Shahul
which is the best public finance economics text book?
Shahul
hello
shafiullah
hello
Shahul
Yes hi
Pov
....
SHAH
what are the alternatives various of economic system
olaleye Reply
what is microeconomics
Ayedun
Micro-economics refers to the branch of economics which deals with smaller unit or element of the economy.
Amadu
or Is the study of individual economic unit in a economy..
Neriel
micro economis is the studay of how Households and firms make decision and they interecr it.
mahad
what is financial intermediaries?
Imran Reply
financial intermediaries are those who are link between borrowers and lenders for.eg bank... Bank is a financial intermediary
Ajit
tnx a lot of u
Imran
most welcome
Ajit
why do you here ? why do you want to learn economics
Ajit
والله العظيم انا ماعاوز اتعلمها
انا باخدها غصب عني في الكليه حضرتك
لس كدااا
I am student of ecnomics ,
Imran
Imran
Abdi
yes Abdi temam
Imran
am good too see you
Abdi
tnx why not
Imran
b/c im student
Abdi
great, now I am sleeping see u nex time ok
Imran
ok
Abdi
OK
Ajit
what is the law of dimis
Toyin Reply
what is the feature of public ownership of production factors
Toyin
what is the demand for commodity that posses identical utilities called
Toyin
law of diminishing utility...as the quantity consumed of a commodity increases,the utility derived from each successive unit goes on decreasing... condition___ consumption of other commodities remaining the same.
Malik
sorry it's...Law of diminishing marginal utility
Malik
demand for commodities that posses identical utilities? The commodities having identical utilities are perfect substitutes...and the demand for such type of commodities is called "Competitive Demand".
Malik
thanks
Toyin
Why many people can't differentiate Economists and financial analysts
Hatimu
what is the function of the central bank in an economic?
Toyin
the central bank may lend some money to banks if necessary
konglan
what economics
Toyin Reply
Is this a question?
Tala
is the study of how societies allocate and manage their scare resources
Neriel
What is populatiin
Azer Reply
Population is a number of people living in a particular area within a particular time
Rabby
Population is the number of people living in a particular geographical area within a particular time
Rabby
how does this chat work
Dalaya
ya the ideas are good thanks friends
South
so what's the next question?
South
what is demand schedule
Toyin Reply
is a tabular representation of the quantity demanded of a particular product at a particular price over a given period of time
Loveth
thanks
Toyin
you are welcome
Loveth
ok
Hassan
What is Monetary Mass
Acha Reply
who is product of traditional economy
jamal Reply
what is elasticity
Suqlain Reply
change in quantity due to change in its price
sj
degree of responsiveness of quantity demanded or supplied due to price.change
Loveth
The law of demand and supply
RICHARD Reply
Law of demand...keep other things constant when price of commodity increases demand is decreases n price decreases demand increases.
sj
law of supply.. keep other things constant when commodity prices increase supply is also increased n price decreases supply is also decreased.
sj
Wow
RICHARD
Thank you
RICHARD
when prices increases causing demand curve to shift to left holding other variables constant.
Amos
what is the difference between quantity demanded nd price
Survival Reply
what is the difference between quantity demand and price
Md
There is an inverse relation between price and the quantity demanded...with the increase in price of a commodity, the demand for the commodity decreases and vice versa..
Malik
professor lionel Robbins define economics as a
ISAAC Reply
as the science that studies human behavior as the relationship between earn and scarce means which has alternative uses
Akon
study of wealth
Suqlain
explain the help of a production possibility diagram how the opprtunity cost of producing different combinations of goods
Leethwinna Reply
please tell me about opportunity cost
narad
it is the cost incurred searching for opportunity without choosing instead..
Ajit
please tell me what indifference curve is..
Amos
combination of 2 goods that gives a same level of satisfaction to the consumer is called indifference curve.
sj

Get the best Principles of economics course in your pocket!





Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?

Ask