Tying law and policy: A decision-theoretic approach

Antitrust Law Journal

Volumn 69, Issue 2, 2001, Pages 469-520

  Hylton, Keith N ^a   Salinger, Michael ^a  

^a NONE

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EID: 0035730228     PISSN: 00036056     EISSN: None     Source Type: Journal    
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References (173)

1. For an early example, see Aaron Director & Edward H. Levi, Law and the Future: Trade Regulation, 51 Nw. U. L. REV. 281 (1956). For discussions of the Chicago School approach, see RICHARD A. POSNER, ANTITRUST LAW: AN ECONOMIC PERSPECTIVE (1976); ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF (1978).
2. For an early example, see Aaron Director & Edward H. Levi, Law and the Future: Trade Regulation, 51 Nw. U. L. REV. 281 (1956). For discussions of the Chicago School approach, see RICHARD A. POSNER, ANTITRUST LAW: AN ECONOMIC PERSPECTIVE (1976); ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF (1978).
3. For an early example, see Aaron Director & Edward H. Levi, Law and the Future: Trade Regulation, 51 Nw. U. L. REV. 281 (1956). For discussions of the Chicago School approach, see RICHARD A. POSNER, ANTITRUST LAW: AN ECONOMIC PERSPECTIVE (1976); ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF (1978).
4. Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984).
5. See, e.g., Steven C. Salop & David T. Scheffman, Raising Rivals' Costs, 73 AM. ECON. REV. 267 (1983); Thomas Krattenmaker & Steven C. Salop, Anticompetitive Exclusion: Raising Rivals' Costs to Achieve Power over Price, 96 YALE L.J. 209 (1986).
6. See, e.g., Steven C. Salop & David T. Scheffman, Raising Rivals' Costs, 73 AM. ECON. REV. 267 (1983); Thomas Krattenmaker & Steven C. Salop, Anticompetitive Exclusion: Raising Rivals' Costs to Achieve Power over Price, 96 YALE L.J. 209 (1986).
7. For an early survey, see Herbert Hovenkamp, Antitrust Policy After Chicago, 84 MICH. L. REV. 213 (1985).
8. Eastman Kodak v. Image Technical Servs., Inc., 504 U.S. 451 (1992). The Court adopted several post-Chicago arguments, and in footnote 21 cited one article from the post-Chicago literature (Howard Beales, Richard Craswell & Steven C. Salop, The Efficient Regulation of Consumer Information, 24 J.L. & ECON. 491 (1981)).
9. United States v. Microsoft Corp., 84 F. Supp.2d 9 (D.D.C. 1999) (Findings of Fact); United States v. Microsoft, 87 F. Supp.2d 30 (D.D.C. 2000) (Conclusions of Law). Judge Jackson's Findings of Fact seem to mirror some of the arguments made by the government's economic experts in the trial, and these arguments were influenced by the post-Chicago literature.
10. For a general treatment of decision theory, see HOWARD RAIFFA, DECISION ANALYSIS (1968). See also Steven C. Salop, Evaluating Uncertain Evidence with Sir Thomas Bayes: A Note for Teachers, 1 J. ECON. PERSP., Summer 1987, at 155.
11. For a general treatment of decision theory, see HOWARD RAIFFA, DECISION ANALYSIS (1968). See also Steven C. Salop, Evaluating Uncertain Evidence with Sir Thomas Bayes: A Note for Teachers, 1 J. ECON. PERSP., Summer 1987, at 155.
12. For an earlier important contribution, see C. Frederick Beckner III & Steven C. Salop, Decision Theory and Antitrust Rules, 67 ANTITRUST L.J. 41 (1999).
13. See infra Part II.A.1. In particular, in Jefferson Parish the Supreme Court said that the per se rule applies only when (1) the seller has tied separate products, Jefferson Parish, 466 U.S. at 20-21; (2) the seller has market power in the tying product, id. at 17; (3) the tie leads to a substantial foreclosure of commerce in the tied market, id. at 16.
14. For a detailed discussion of Jefferson Parish, see infra Part II.A.2. One might argue that the separate-products inquiry of Jefferson Parish makes the per se rule equivalent to a rule of reason test. We consider and reject that argument in Part II.A.2.
15. In particular, the Whinston model (see infra Part II.C.1) shows that tying may be anticompetitive when the market for the tied good is potentially oligopolistic because of the presence of entry barriers. This suggests that in addition to the conditions required by Jefferson Parish (separate products, market power in tying good, substantial foreclosure in tied market), the presence of entry barriers in the tied good should be listed as a fourth necessary condition for triggering the per se rule. We are unable in our analysis below (infra Part III.C) to identify a set of factors among those discussed in the literature and case law that would justify a court's decision to treat these four conditions as sufficient for triggering per se analysis.
16. See JEAN TIROLE, THE THEORY OF INDUSTRIAL ORGANIZATION 174 (1988).
17. United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) (Microsoft III).
18. See Response of Carolina, Inc. v. Leasco Response, Inc., 537 F.2d 1307, 1330 (5th Cir. 1976) (violations should be limited to instances where the integration "has been for the purpose of tying the products, rather than to achieve some technologically beneficial result."); United States v. Microsoft Corp., 147 F. 3d 935, 949-50 (D.C. Cir. 1998) (reviewing antitrust law on technological integration and concluding: "The short answer is thus that integration may be considered genuine if it is beneficial when compared to a purchaser combination. . . . In antitrust law, from which this whole proceeding springs, the courts have recognized the limits of their institutional competence and have on that ground rejected theories of 'technological tying.'"); see also 10 PHILLIP E. AREEDA ET AL., ANTITRUST LAW ¶ 1757c (1996). For further discussion of the law governing technological integration, see infra Part II.A.2.
19. Microsoft III, 253 F.3d at 94-95. Although the D.C. Circuit rejected the approach of district court judge, Thomas Penfield Jackson, it adopted a test that is virtually identical to the one articulated by Judge Jackson in his opinion. See United States v. Microsoft Corp., 87 F. Supp.2d 30, 48-49 (D.D.C. 2000).
20. Caldera, Inc. v. Microsoft Corp., 72 F. Supp.2d 1295 (D. Utah 1999) (Caldera).
21. Id. at 1325.
22. United States v. Microsoft Corp., 147 F.3d 935 (D.C. Cir. 1998) (Microsoft II).
23. Id. at 950.
24. Microsoft III, 253 F.3d at 92 (stating that Microsoft II is limited to case of interpreting consent decree)).
25. See infra Part IV.A.
26. Tying theory includes classical, Chicago, and post-Chicago categories. We refer to only classical and post-Chicago categories of tying law because the Chicago influence, we hope to make clear below, has largely been in the form of altering the interpretation of classical doctrine rather than changing the doctrine itself.
27. The term "forcing" is emphasized in Jefferson Parish. In the Court's opinion Justice Stevens remarks, "Our cases have concluded that the essential characteristic of an invalid tying arrangement lies in the seller's exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms. When such 'forcing' is present, competition on the merits in the market for the tied item is restrained and the Sherman Act is violated." Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12 (1984). No court has provided a special legal definition of forcing. However, the Jefferson Parish opinion suggests that forcing can only occur in settings in which the consumers have few alternatives to begin with (because of the defendant's market power) and the defendant has actively restricted their choices further by requiring them to purchase the tied product with the tying product. Id. at 16. Jefferson Parish seems to reject the theory that consumers can be "forced" by their own inability to engage in intelligent comparison-shopping. Id. at 27-28.
28. One example of such leveraging, discussed in the case law, is price discrimination. See Fortner Enters., Inc v. United States Steel Corp., 429 U.S. 610, 617-18 (1976) (Fortner II) (suggesting that antitrust violation is less likely, given that tying arrangement could not have been used as a form of price discrimination).
29. One could say that the doctrine seeks to prohibit tying when the defendant has market power in the tying market, could use that power to gain additional power (e.g., in the tied market), and also harm consumers. It follows that the doctrine requires plaintiffs to present evidence of market power, consumer harm (forcing), and a credible theory of tying as a method of monopoly extension (leveraging). We interpret the leveraging inquiry as including the case in which tying is used to maintain a monopoly position. See Robin Cooper Feldman, Defensive Leveraging in Antitrust, 87 GEO. L.J. 2079 (1999). The per se tying prohibition, which makes tying unlawful when the tie-in involves separate products, the seller has market power in the tying good, and there is substantial foreclosure in the tied good market, Jefferson Parish, 466 U.S. at 16-21, is part of classical tying doctrine, though not a necessary feature of it. As Justice O'Connor noted in her concurrence in Jefferson Parish, the lines of inquiry required by classical tying analysis could be pursued without requiring much more effort under a rule of reason test. Jefferson Parish, 466 U.S. at 33-35. What seems to be essential to the classical legal framework is the presumption that the defendant should be found in violation of the law, in the absence of good justification, if the classical doctrine requirements are satisfied. Consistent with this view, the per se rule should be seen as an attempt to restrict the set of conditions under which the presumption of illegality may be rebutted.
30. One could say that the doctrine seeks to prohibit tying when the defendant has market power in the tying market, could use that power to gain additional power (e.g., in the tied market), and also harm consumers. It follows that the doctrine requires plaintiffs to present evidence of market power, consumer harm (forcing), and a credible theory of tying as a method of monopoly extension (leveraging). We interpret the leveraging inquiry as including the case in which tying is used to maintain a monopoly position. See Robin Cooper Feldman, Defensive Leveraging in Antitrust, 87 GEO. L.J. 2079 (1999). The per se tying prohibition, which makes tying unlawful when the tie-in involves separate products, the seller has market power in the tying good, and there is substantial foreclosure in the tied good market, Jefferson Parish, 466 U.S. at 16-21, is part of classical tying doctrine, though not a necessary feature of it. As Justice O'Connor noted in her concurrence in Jefferson Parish, the lines of inquiry required by classical tying analysis could be pursued without requiring much more effort under a rule of reason test. Jefferson Parish, 466 U.S. at 33-35. What seems to be essential to the classical legal framework is the presumption that the defendant should be found in violation of the law, in the absence of good justification, if the classical doctrine requirements are satisfied. Consistent with this view, the per se rule should be seen as an attempt to restrict the set of conditions under which the presumption of illegality may be rebutted.
31. One could say that the doctrine seeks to prohibit tying when the defendant has market power in the tying market, could use that power to gain additional power (e.g., in the tied market), and also harm consumers. It follows that the doctrine requires plaintiffs to present evidence of market power, consumer harm (forcing), and a credible theory of tying as a method of monopoly extension (leveraging). We interpret the leveraging inquiry as including the case in which tying is used to maintain a monopoly position. See Robin Cooper Feldman, Defensive Leveraging in Antitrust, 87 GEO. L.J. 2079 (1999). The per se tying prohibition, which makes tying unlawful when the tie-in involves separate products, the seller has market power in the tying good, and there is substantial foreclosure in the tied good market, Jefferson Parish, 466 U.S. at 16-21, is part of classical tying doctrine, though not a necessary feature of it. As Justice O'Connor noted in her concurrence in Jefferson Parish, the lines of inquiry required by classical tying analysis could be pursued without requiring much more effort under a rule of reason test. Jefferson Parish, 466 U.S. at 33-35. What seems to be essential to the classical legal framework is the presumption that the defendant should be found in violation of the law, in the absence of good justification, if the classical doctrine requirements are satisfied. Consistent with this view, the per se rule should be seen as an attempt to restrict the set of conditions under which the presumption of illegality may be rebutted.
32. For further discussion, see infra Part II.A.2.
33. International Salt Co. v. United States, 332 U.S. 392 (1947).
34. Northern Pac. Ry. Co. v. United States, 356 U.S. 1 (1958).
35. IBM v. United States, 298 U. S. 131 (1936), should be named among this list of classical theory cases. IBM is important for two reasons. First, it establishes the leverage theory as the basis for concern under tying doctrine. Second, IBM establishes the norm under tying doctrine that "goodwill defenses" will have to meet a very high burden. In other words, a defendant that claims it must tie in order to maintain the quality of the bundle must prove that quality could not be maintained through some less-restrictive alternative. This norm has been adhered to in subsequent cases, such as International Salt and Jerrold Electronics (United States v. Jerrold Electronics Corp., 187 F. Supp. 545, 560 (E.D. Pa. 1960), aff'd per curiam, 365 U.S. 567 (1961)). Jerrold Electronics establishes an exception to the per se rule for the case in which tying is used in order to enter into a new industry. See Jerrold Electronics, 187 F. Supp. at 557. Under the Jerrold Electronics exception, courts will impose a much lower burden on defendants who assert a goodwill defense for tying.
36. International Salt, 332 U.S. at 395.
37. Northern Pacific, 356 U.S. at 7-8.
38. More specifically, Northern Pacific provides that the per se rule applies if the defendant has sufficient economic power in the tying market to appreciably restrain competition in the tied product market, and a "not insubstantial" amount of commerce has been foreclosed in the tied market. Id. at 11.
39. International Salt, 332 U.S. at 396-97; Northern Pacific, 356 U.S. at 12.
40. International Salt, 332 U.S. at 396-97; Northern Pacific, 356 U.S. at 12.
41. It is doubtful that the defendant could have included a monopoly surcharge in the price of the tied product. Given the opt-out clause, and other evidence, Peterman suggests that the tie in International Salt probably served efficiency purposes. John L. Peterman, The International Salt Case, 22 J.L. & ECON. 351 (1979). Since railroads have high fixed costs, and need to maximize service in order to minimize the average cost of rail service, the tie-in in Northern Pacific could have been designed to facilitate full or nearly full utilization of the railroad's infrastructure. This would have benefited the railroad's consumers by lowering the price of rail service to them over time.
42. International Salt, 332 U.S. at 397; Northern Pacific, 356 U.S. at 7-8. We note that the market for salt, the tied product in the International Salt case, was probably competitive. See Peterman, supra note 33, at 357.
43. International Salt, 332 U.S. at 397; Northern Pacific, 356 U.S. at 7-8. We note that the market for salt, the tied product in the International Salt case, was probably competitive. See Peterman, supra note 33, at 357.
44. Standard Oil Co. v. United States, 337 U.S. 293 (1949) (Standard Stations).
45. Id. at 305.
46. The important Chicago-influenced changes in predatory pricing doctrine are reflected in Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986), and Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). Matsushita and Brooke Group impose a "recoupment" test that requires plaintiffs to show that the defendant reasonably could have expected to recoup losses incurred in a predatory pricing campaign. For a critique of this doctrine, as well as the Chicago theory that inspired it, see Patrick Bolton, Joseph F. Brodley, & Michael H. Riordan, Predatory Pricing: Strategic Theory and Legal Policy, 88 GEO. L.J. 2239 (2000).
47. The defendant U.S. Steel offered to finance the cost of acquiring and developing land provided the developer agreed to purchase U.S. Steel's prefabricated homes. Fortner II, 429 U.S. at 611.
48. Id. at 620-22.
49. Id. at 618.
50. Any patient planning to undergo surgery at the East Jefferson Hospital had to use the anesthesiologists on the hospital staff. Jefferson Parish, 466 U.S. at 4-5.
51. Id. at 27-29.
52. Id. at 26.
53. Id. at 27-28. The Court used the more general term "market imperfections," which were caused by the fact that "the prevalence of third-party payment for health care reduces price competition," and "a lack of adequate information renders consumers unable to evaluate the quality of medical care provided by competing hospitals." Id. at 27.
54. Id. at 28-29.
55. Such forcing, the Court stressed, requires the blocking of competition on the merits, id. at 28, and imperfect information does not imply that the seller's tie-in has restricted competition in the sense of forcing a purchase that would not have otherwise been made or preventing a purchase that would have been.
56. Id. at 21-22.
57. Id. at 12 ("the essential characteristic of an invalid tying arrangement lies in the seller's exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms.").
58. On the efficiency of bundling and the decision to sell products separately, see infra Part III.B (example of bundling to save packaging costs).
59. Microsoft III, 253 F.3d at 88.
60. Id. at 87-88.
61. Id. at 92-93.
62. Jefferson Parish, 466 U.S. at 33.
63. Id. at 39.
64. Id. at 40.
65. Response of Carolina, Inc. v. Leasco Response, Inc., 537 F.2d 1307 (5th Cir. 1976) (Leasco).
66. Id. at 1330; see also AREEDA ET AL., supra note 13 (technological tying claim requires proof that design or redesign of product "is 'artificial' in that it lacks a technological advantage or purchaser utility").
67. Cal. Computer Prods., Inc. v. IBM, 613 F.2d 727 (9th Cir. 1979) (directed verdict for IBM because design changes made to product were a cost-saving effort rather than an attempt to monopolize); Innovation Data Processing, Inc. v. IBM, 585 F. Supp. 1470, 1476 (D.N.J. 1984) (finding that IBM's integration of a "dump-restore" utility into mainframe operating system was a lawful package of technologically interrelated components); ILC Peripherals Leasing Corp. v. IBM, 448 F. Supp. 228 (N.D. Cal. 1978), (finding that disk drives and head/disk assembly combination were lawful), aff'd per curiam sub nom. Memorex Corp. v. IBM, 636 F.2d 1188 (9th Cir. 1980); In re IBM Peripheral EDP Devices Antitrust Litig., 481 F. Supp. 965 (N.D. Cal. 1979) (finding, among other things, that IBM's design changes for the interface between the central processing units and certain peripherals and for certain models of central processing units were not unreasonably restrictive of competition), affd sub nom. Transamerica Computer Co. v. IBM, 698 F.2d 1377 (9th Cir. 1983); Telex Corp. v. IBM, 367 F. Supp. 258 (N.D. Okla. 1973), (denying a claim that IBM's integration of additional memory and control functions into its central processing unit constituted unlawful tying), rev'd on other grounds, 510 F.2d 894 (10th Cir. 1975).
68. See, e.g., Telex Corp. v. IBM, 367 F. Supp. at 306 ("In the court's view it would not be a proper application of the antitrust laws under the circumstances shown by the record to preclude or discourage the utilization of advancing technology by this type of integration."). Another prominent case of integration decided on the same theory involved Kodak's simultaneous introduction of the 110 Instamatic camera and Kodacolor II film, requiring new equipment for development. Foremost Pro Color, Inc v. Eastman Kodak Co., 703 F.2d 534 (9th Cir. 1983). Foremost, one of Kodak's competitors in the photo finishing business, brought suit on the theory that this constituted an unlawful tying arrangement. The court rejected Foremost's claim on the ground that "any other conclusion would unjustifiably deter the development and introduction of those new technologies so essential to the continued progress of the economy." Id. at 542-43.
69. For an empirical evaluation of the benefits of innovation in one particular product line, see Amil Petrin, Quantifying the Benefits of New Products: The Case of the Minivan (Nat'l Bureau of Econ. Research, Working Paper 8227, Apr. 2001), available at http:// www.nber.org/papers/w8227.
70. 504 U.S. 451 (1992).
71. Kodak sold copying machines and provided parts and service for the machines. In an attempt to eliminate independent service organizations, Kodak tied service to parts by selling parts only to equipment owners who relied on Kodak for service or who self-serviced their equipment. Eastman Kodak, 504 U.S. at 458.
72. Id. at 451.
73. Id. at 477-78.
74. Metzler v. Bear Automotive Serv. Equip. Co., 19 F. Supp.2d 1345, 1357 (S.D. Fla. 1998) (Metzler); Lee v. Life Ins. Co. of N. Am., 23 F.3d 14, 19 (1st Cir. 1994); Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430, 440 (3d Cir. 1997). In particular, if a firm that does not have market power in the original equipment market announces in advance that it will tie service to parts, it will not be found liable for unlawful tying. Metzler, 19 F. Supp.2d at 1364-65.
75. Microsoft III, 253 F.3d. at 84.
76. Trial court judge Thomas Penfield Jackson had held that Microsoft violated Section 1 of the Sherman Act by integrating the Internet Explorer Web browser with the Windows operating system. Microsoft III, 87 F. Supp.2d 30, 47-51 (D.D.C. 2000). Using the separate-products test of the Jefferson Parish majority, Jackson concluded that the Web browser and the operating system were separate products. Id. at 49.
77. Microsoft III, 253 F.3d at 92-93.
78. Paradoxically, the rule of reason test adopted by the D.C. Circuit is virtually indistin-guishable, except for the allocation of the proof burden, from the per se test adopted by Judge Jackson. Judge Jackson's interpretation of Eastman Kodak led him to reject the deferential proof standard of Microsoft II, 87 F. Supp.2d at 47-48, and to hold that the defendant, in order to prevail, must demonstrate procompetitive justifications sufficient to outweigh anticompetitive effects. Id. at 48-49.
79. Provided, of course, that the platform seller has sufficient market power to trigger scrutiny under tying doctrine. For a platform seller with a small market share, the risk of having to pay treble damages as the result of a design choice is negligible.
80. Caldera, Inc. v. Microsoft Corp., 72 F. Supp.2d 1295 (D. Utah 1999).
81. Id. at 1325.
82. Although the D.C. Circuit limited Microsoft II in its Microsoft III opinion, the Caldera court had interpreted Microsoft II as providing a rule regarding the standard of proof. The Caldera court explicitly rejected the Microsoft II standard. Caldera, 72 F. Supp.2d at 1323-25.
83. Microsoft II, 147 F.3d at 950.
84. Caldera, 72 F. Supp.2d at 1325-26 ("Accordingly, the technological improvements must have demonstrated efficiencies. This is more than just a 'plausible claim that brings some advantage.'").
85. Both Caldera and Microsoft II state clear rules governing the allocation of proof - rules that had not been clarified in earlier cases. Given this, one might argue that it is Microsoft II that is the novel case rather than Caldera. As our discussion in the text suggests, we view Caldera as the novel interpretation because Microsoft II follows the pattern of a substantial line of cases (e.g., the IBM cases) articulating a deferential approach toward technological integration decisions.
86. Leasco, 537 F.2d at 1329-31.
87. The founding of the Bell Journal of Economics in 1970 roughly coincides with and may well have been an important cause of the increased level of mathematical sophistication underlying theory in industrial economics and law and economics.
88. See Ward S. Bowman, Tying Arrangements and the Leverage Problem, 67 YALE L.J. 19, 23-24 (1957) (noting the ambiguity of the leverage hypothesis).
89. For early examples, see Director & Levi, supra note 1; Bowman, supra note 79.
90. Chicago School legal theorists relied on Chicago School industrial economics. For an example of the Chicago School approach to industrial economics, see GEORGE J. STIGLER, THE ORGANIZATION OF INDUSTRY (1968). Contrast it with, for example, F.M. SCHERER, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE (1970). The Chicago School relied on models in which markets were assumed to be either monopolistic or perfectly competitive. Thus, the analysis of actions, such as tying and vertical integration, turned on whether a monopolist in one market could use these practices to extend the monopoly to another. See John M. Vernon & Daniel A. Graham, Profitability of Monopolization by Vertical Integration, 79 J. POL. ECON. 924 (1971). The Chicago School also analyzed situations in which two products were monopolized and asked whether the coordination of these monopolies could harm consumers. Joseph J. Spengler, Vertical Integration and Antitrust Policy, 58 J. POL. ECON. 347 (1950).
91. Chicago School legal theorists relied on Chicago School industrial economics. For an example of the Chicago School approach to industrial economics, see GEORGE J. STIGLER, THE ORGANIZATION OF INDUSTRY (1968). Contrast it with, for example, F.M. SCHERER, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE (1970). The Chicago School relied on models in which markets were assumed to be either monopolistic or perfectly competitive. Thus, the analysis of actions, such as tying and vertical integration, turned on whether a monopolist in one market could use these practices to extend the monopoly to another. See John M. Vernon & Daniel A. Graham, Profitability of Monopolization by Vertical Integration, 79 J. POL. ECON. 924 (1971). The Chicago School also analyzed situations in which two products were monopolized and asked whether the coordination of these monopolies could harm consumers. Joseph J. Spengler, Vertical Integration and Antitrust Policy, 58 J. POL. ECON. 347 (1950).
92. Chicago School legal theorists relied on Chicago School industrial economics. For an example of the Chicago School approach to industrial economics, see GEORGE J. STIGLER, THE ORGANIZATION OF INDUSTRY (1968). Contrast it with, for example, F.M. SCHERER, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE (1970). The Chicago School relied on models in which markets were assumed to be either monopolistic or perfectly competitive. Thus, the analysis of actions, such as tying and vertical integration, turned on whether a monopolist in one market could use these practices to extend the monopoly to another. See John M. Vernon & Daniel A. Graham, Profitability of Monopolization by Vertical Integration, 79 J. POL. ECON. 924 (1971). The Chicago School also analyzed situations in which two products were monopolized and asked whether the coordination of these monopolies could harm consumers. Joseph J. Spengler, Vertical Integration and Antitrust Policy, 58 J. POL. ECON. 347 (1950).
93. Chicago School legal theorists relied on Chicago School industrial economics. For an example of the Chicago School approach to industrial economics, see GEORGE J. STIGLER, THE ORGANIZATION OF INDUSTRY (1968). Contrast it with, for example, F.M. SCHERER, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE (1970). The Chicago School relied on models in which markets were assumed to be either monopolistic or perfectly competitive. Thus, the analysis of actions, such as tying and vertical integration, turned on whether a monopolist in one market could use these practices to extend the monopoly to another. See John M. Vernon & Daniel A. Graham, Profitability of Monopolization by Vertical Integration, 79 J. POL. ECON. 924 (1971). The Chicago School also analyzed situations in which two products were monopolized and asked whether the coordination of these monopolies could harm consumers. Joseph J. Spengler, Vertical Integration and Antitrust Policy, 58 J. POL. ECON. 347 (1950).
94. To elaborate, there is an extensive literature on the possibility of bundling to accom-plish much the same goals as price discrimination. This argument potentially applies to a wide variety of goods in which most customers buy bundles that contain components they do not want. Most cable subscribers have little interest in some channels included with basic cable service. Most buyers of newspapers likely discard entire sections. Purchasers of such goods may often feel that they are forced to buy something they do not want. Forcing a company to sell on an unbundled basis would not, however, necessarily make consumers better off (even if doing so did not increase transactions costs). The reason is that the sum of the prices a company would charge for the components would exceed the bundle price. Thus, while consumers who would buy a sufficiently small fraction of the bundle might well be hurt, others benefit; and there is no reason to suppose that consumers in aggregate are hurt by this practice.
95. Suppose, for example, that the widgets and gadgets both cost $1 to produce and that the widget monopolist would charge $3 if it bundled. The firm can do just as well by charging $2 for widgets and relying on the competitive markets to supply gadgets for $1.
96. STIGLER, supra note 81, at 165-70. Another famous example is that of "metering," in which one good is used to monitor the intensity of demand for the monopoly good. For example, a camera monopolist might sell its camera at the competitive price and put the monopoly surcharge into the price of film. As in Stigler's movie example, there is no general result that tying is harmful to consumers.
97. Since this analysis was based on a single highly stylized example, a literature developed to explore the applicability of the findings to more general sets of assumptions. See Walter J. Adams & Janet L. Yellen, Commodity Bundling and the Burden of Monopoly, 90 Q.J. ECON. 475 (1976); Richard L. Schmalensee, Gaussian Demand and Commodity Bundling, 57 J. Bus. S211 (1984); R. Preston McAfee, John McMillan & Michael D. Whinston, Multiproduct Monopoly, Commodity Bundling, and Correlation of Values, 104 Q. J. ECON. 371 (1989); Michael A. Salinger, A Graphical Analysis of Bundling, 68 J. Bus. 85 (1995); Yannos Bakos & Eric Brynjolfsson, Bundling Information Goods: Pricing, Profits, and Effidency, 45 MGMT. Sci. 1613 (1999).
98. Since this analysis was based on a single highly stylized example, a literature developed to explore the applicability of the findings to more general sets of assumptions. See Walter J. Adams & Janet L. Yellen, Commodity Bundling and the Burden of Monopoly, 90 Q.J. ECON. 475 (1976); Richard L. Schmalensee, Gaussian Demand and Commodity Bundling, 57 J. Bus. S211 (1984); R. Preston McAfee, John McMillan & Michael D. Whinston, Multiproduct Monopoly, Commodity Bundling, and Correlation of Values, 104 Q. J. ECON. 371 (1989); Michael A. Salinger, A Graphical Analysis of Bundling, 68 J. Bus. 85 (1995); Yannos Bakos & Eric Brynjolfsson, Bundling Information Goods: Pricing, Profits, and Effidency, 45 MGMT. Sci. 1613 (1999).
99. Since this analysis was based on a single highly stylized example, a literature developed to explore the applicability of the findings to more general sets of assumptions. See Walter J. Adams & Janet L. Yellen, Commodity Bundling and the Burden of Monopoly, 90 Q.J. ECON. 475 (1976); Richard L. Schmalensee, Gaussian Demand and Commodity Bundling, 57 J. Bus. S211 (1984); R. Preston McAfee, John McMillan & Michael D. Whinston, Multiproduct Monopoly, Commodity Bundling, and Correlation of Values, 104 Q. J. ECON. 371 (1989); Michael A. Salinger, A Graphical Analysis of Bundling, 68 J. Bus. 85 (1995); Yannos Bakos & Eric Brynjolfsson, Bundling Information Goods: Pricing, Profits, and Effidency, 45 MGMT. Sci. 1613 (1999).
100. Since this analysis was based on a single highly stylized example, a literature developed to explore the applicability of the findings to more general sets of assumptions. See Walter J. Adams & Janet L. Yellen, Commodity Bundling and the Burden of Monopoly, 90 Q.J. ECON. 475 (1976); Richard L. Schmalensee, Gaussian Demand and Commodity Bundling, 57 J. Bus. S211 (1984); R. Preston McAfee, John McMillan & Michael D. Whinston, Multiproduct Monopoly, Commodity Bundling, and Correlation of Values, 104 Q. J. ECON. 371 (1989); Michael A. Salinger, A Graphical Analysis of Bundling, 68 J. Bus. 85 (1995); Yannos Bakos & Eric Brynjolfsson, Bundling Information Goods: Pricing, Profits, and Effidency, 45 MGMT. Sci. 1613 (1999).
101. Since this analysis was based on a single highly stylized example, a literature developed to explore the applicability of the findings to more general sets of assumptions. See Walter J. Adams & Janet L. Yellen, Commodity Bundling and the Burden of Monopoly, 90 Q.J. ECON. 475 (1976); Richard L. Schmalensee, Gaussian Demand and Commodity Bundling, 57 J. Bus. S211 (1984); R. Preston McAfee, John McMillan & Michael D. Whinston, Multiproduct Monopoly, Commodity Bundling, and Correlation of Values, 104 Q. J. ECON. 371 (1989); Michael A. Salinger, A Graphical Analysis of Bundling, 68 J. Bus. 85 (1995); Yannos Bakos & Eric Brynjolfsson, Bundling Information Goods: Pricing, Profits, and Effidency, 45 MGMT. Sci. 1613 (1999).
102. The result that tying increases consumer surplus is not a general result, but neither is there any reason to suppose that tying lowers consumer welfare. Tying leads to some inefficiencies. That is, even if someone who obtains a gadget along with a widget values the gadget at more than the cost of production, there might be another customer that does not purchase the bundle who values gadgets more than some of the people who obtain them. On the other hand, the price a company charges for a bundle of goods is typically less than the sum of the prices it would choose if it sold them separately. Thus, people who would have purchased both goods if they were sold separately typically benefit from bundling.
103. Specifically, a key feature of essentially all post-Chicago analysis is a reliance on economic models either of oligopoly or of entry deterrence.
104. Michael D. Whinston, Tying, Foreclosure, and Exclusion, 80 AM. ECON. REV. 837 (1990).
105. st unit must be less than $10. Under perfect competition, price equals marginal cost. The combination of MC < AC with scale economies cannot exist (in the long run) with the condition that P = MC in perfect competition. Together, they imply P < AC, which means that firms earn negative profits.
106. In virtually all markets, there are scale economies up to some level of output and, as a result, entrants must attain sufficient scale to survive. When efficient scale is small relative to the total market output, a market can be perfectly competitive (or at least nearly so). Scale economies make a market naturally monopolistic or oligopolistic when the scale economies are large relative to the market, in which case at most a small number of efficient firms can co-exist.
107. Whinston, supra note 88, § I Ex. 2.
108. This argument rests on the assumption that everyone buys a widget at a price of $2.
109. For an extended analysis, see Barry Nalebuff, Bundling (Yale Int'l Ctr. for Fin., Working Paper No. 99-14, Nov. 22, 1999), available at http://papers.ssrn.com/sol3/paper .cfm?abstract_id=185193. Nalebuff examines two reasons for tying and the interrelationship between them. The first is that even a monopolist over two products might have an incentive to bundle them even if there is no threat of entry. The incentive to do so depends on the correlation of reservation values across customers, the marginal cost of the goods, and the extent to which bundling itself saves costs. The second is that bundling two products might make it difficult to enter with just one. This effect is related to one of the traditional concerns about vertical integration, which is that it makes entry more difficult by making it impossible to enter at just one stage. The relationship between the two is that bundling can be a relatively inexpensive form of entry deterrence. Suppose a company has a monopoly over widgets and gadgets and that the monopoly price for each is $2. Depending on the marginal cost of production and the correlation of reservation values, it might be able to earn more money by selling them only as a bundle and charging, say, $3.50. Moreover, the company might not be able to charge $2 each selling the goods separately because it might face entry. If so (and if it cannot deter entry by threatening to cut its price once entry occurs), it cannot get the full monopoly price. With bundling, however, it might be able to get the full $3.50 because entry is less of a threat. Without bundling, an entrant into the widget market can capture the entire market simply by offering a lower price. With bundling, people who value gadgets will get widgets in their bundle. This limits the potential market for a widget producer and, given Nalebuff's assumption of increasing returns to scale, makes it possible that a would-be widget competitor cannot enter profitably. In the Nalebuff analysis, it is not clear that tying is harmful. He primarily examines cases in which tying, in the absence of the threat of entry, would be beneficial. His observation is that it might also have the side benefit of deterring entry. Given that his assumptions are somewhat unconventional, some will question his conclusions. Even if they are correct, however, they are points about corporate strategy. By themselves, at least, they do not justify any limitation on tying.
110. JOE S. BAIN, BARRIERS TO NEW COMPETITION (1956).
111. For a recent exposition of what is known as the "Bain limit pricing model," see Richard J. Gilbert, Mobility Barriers and the Value of Incumbency, in 1 HANDBOOK OF INDUSTRIAL ORGANIZATION 475, 480 (Richard Schmalensee & Robert D. Willig eds., 1989).
112. Id. at 485.
113. Reinhart Selten, Reexamination of the Perfectness Concept for Equilibrium Points in Extensive Games, 4 INT'L J. GAME THEORY 25 (1975).
114. Avinash Dixit, The Role of Investment in Entry-Deterrence, 90 ECON. J. 95 (1980).
115. See Gilbert, supra note 95, at 515.
116. Put another way, competition from one component does not constrain the system price. With competition in all components, however, a consumer can assemble an entire system that contains no element produced by Monocorp. The competing system (or systems) constrains the price that Monocorp can charge for a system.
117. This assertion is based on the assumption that Monocorp cannot charge different prices for monitors depending on whether they are used as a part of a computer system.
118. Dennis W. Carlton & Michael Waldman, The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries (Nat'l Bureau of Econ. Research, Working Paper No. 6831, Dec. 1998), available at http://www.nber.org/papers/w6831/.
119. Network externalities are benefits consumers enjoy because a product is used widely, such as a software product that facilitates file sharing. For discussions of network effects and antitrust law, see David A. Balto, Networks and Exclusivity: Antitrust Analysis to Promote Network Competition, 7 GEO. MASON L. REV. 523 (1999); Carl Shapiro, Exclusivity in Network Industries, 7 GEO. MASON L. REV. 673 (1999).
120. Network externalities are benefits consumers enjoy because a product is used widely, such as a software product that facilitates file sharing. For discussions of network effects and antitrust law, see David A. Balto, Networks and Exclusivity: Antitrust Analysis to Promote Network Competition, 7 GEO. MASON L. REV. 523 (1999); Carl Shapiro, Exclusivity in Network Industries, 7 GEO. MASON L. REV. 673 (1999).
121. Joseph Farrell & Michael L. Katz, Innovation, Rent Extraction, and Integration in Systems Markets (Jan. 4, 2000) (unpublished manuscript on file with authors).
122. They cannot raise their price. The quantity they sell goes up, but they get no benefit because they are charging a price that just covers their marginal cost.
123. A firm's optimal expenditure on R&D turns on a weighing of the marginal benefit and the marginal cost. Marginal cost does not depend on whether the firm is integrated. The integrated firm does get a greater marginal benefit from innovation because R&D expenditures by printer producers can benefit computer producers. The integrated firm captures this latter benefit whereas an independent printer producer does not.
124. To illustrate this point with a numerical example, suppose that each printer firm would spend $100 million on R&D if each remained unintegrated. Now suppose that one of the firms integrates into computers and, because it internalizes the effects of printer improvements on computer sales, increases its R&D budget to $150 million. The issue is whether that increase should be understood as procompetitive or anticompetitive. The position implicitly endorsed by Farrell and Katz is whether it is anticompetitive depends on whether it passes (or at least does not fail) a social welfare test. Before adopting such a standard, courts should consider how the welfare analysis would be conducted. Real settings would inevitably be (much) more complicated than the stylized settings of the models; and, because both expert and judicial error would be distinct possibilities, issues such as the burdens and standards of proof should properly depend on assessments of the relative frequency of procompetitive and anticompetitive R&D.
125. To continue with the numerical example from the previous note, competing printer producers could conceivably lower their R&D on the grounds that competing with the integrated firm's higher spending would not be worth the chase. Another possibility, though, is that they would increase their R&D in order to produce printers that would be able to compete successfully with those of the integrated firm.
126. See TIROLE, supra note 11, at 389-401.
127. Id.
128. Franklin M. Fisher, Games Economists Play: A Noncooperative View, 20 RAND J. ECON. 113 (1989).
129. And even if the cost/demand condition is satisfied in one time period, it may not be satisfied in the next in an expanding market. Thus, a firm that is deterred from entering in period 1 need only delay its entry until period 2, when the market is larger.
130. DENNIS W. CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL ORGANIZATION 466 (1990). For the observation that tying is ubiquitous, see also LAWRENCE A. SULLIVAN, ANTITRUST 443 (1977).
131. DENNIS W. CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL ORGANIZATION 466 (1990). For the observation that tying is ubiquitous, see also LAWRENCE A. SULLIVAN, ANTITRUST 443 (1977).
132. The matrix need not be 2 × 2. There can be different gradations of harmful and different gradations of illegal.
133. It is important to be clear, though, that a false conviction does not necessarily mean that a trial would actually occur and result in a conviction. Included in false convictions are benign occurrences that do not occur because of the belief that they could be challenged in court. Indeed, some false convictions might entail cases that would not be found in violation of the law if they went to trial but which nonetheless do not occur because of uncertainty about the law or courts' enforcement of it.
134. The terms that are more commonly used in decision theory for the two possible types of errors are "false negatives" and "false positives." Here, we adopt the terminology used in C. Frederick Beckner III & Steven C. Salop, Decision Theory and Antitrust Rules, 67 ANTITRUST L.J. 41 (1999).
135. Because the percentage of harmful and benign cases is not a function of the legal rule, the sums of the respective columns in the two tables are the same. In this particular case, 30% of the cases are harmful and 70% are not. In contrast, the fraction of cases that are legal is not constant. Under Rule A, 25% of cases violate the rule whereas only 11% violate Rule B.
136. See United States v. Trenton Potteries Co., 273 U.S. 392, 397-98 (1927).
137. Since only 0.1% of instances of bundling are harmful, it follows that 99.9% are not. In the table, the sum of the percentages under "Harmful" is 0.1% and the sum of the two cells under "Not Harmful" is 99.9%. Note also that the ratio 97.94/99.9 is roughly equal to 98 percent - which is the fraction of benign cases judged to be legal.
138. This follows from applying Bayes's Theorem: note that 95.1% = 1.96% divided by (0.1% + 1.96%). For a discussion of Bayes's Theorem, see ROBERT D. MASON ET AL., STATISTICAL TECHNIQUES IN BUSINESS AND ECONOMICS 163-64 (10th ed. 1999).
139. The case of the widget monopolist who can cut its packaging costs by tying gadgets also reveals ways in which market constraints reduce the relative cost of false acquittals. The Chicago School literature has shown that the likelihood of anticompetitive harm is extremely small when the market for the tied good is competitive, so we need only consider the case where the market for the tied good is susceptible to monopolization. Even in this case, competitive pressures constrain the relative frequencies of harmful and beneficial tying. If the savings that result from bundling are sufficiently large, they may so far outweigh any losses due to competitive barriers that all consumers are better off under the tie-in. In the mixed case where some consumers gain and others lose, this may not be the case. Still, given the likelihood that entry will be encouraged where consumers are harmed, one should expect that most cases of bundling observed in the market will be those in which the typical consumer is better off on net.
140. The principle of allowing tying in cases when it would arise in a competitive market underlies the test proposed by Ordover and Willig. For a discussion of the general principle, see Janusz A. Ordover & Robert D. Willig, An Economic Definition of Predation: Pricing and Product Innovation, 91 YALE L.J. 8 (1981). For a discussion of how the principle relates to tying in technologically advanced markets such as computer software, see Janusz A. Ordover & Robert D. Willig, Access and Bundling in High-Technology Markets, in COMPETITION, INNOVA- TION, AND THE MICROSOFT MONOPOLY: ANTITRUST IN THE DIGITAL MARKET PLACE 103 (Jeffrey A. Eisenach & Thomas M. Lenard eds., 1999).
141. The principle of allowing tying in cases when it would arise in a competitive market underlies the test proposed by Ordover and Willig. For a discussion of the general principle, see Janusz A. Ordover & Robert D. Willig, An Economic Definition of Predation: Pricing and Product Innovation, 91 YALE L.J. 8 (1981). For a discussion of how the principle relates to tying in technologically advanced markets such as computer software, see Janusz A. Ordover & Robert D. Willig, Access and Bundling in High-Technology Markets, in COMPETITION, INNOVA-TION, AND THE MICROSOFT MONOPOLY: ANTITRUST IN THE DIGITAL MARKET PLACE 103 (Jeffrey A. Eisenach & Thomas M. Lenard eds., 1999).
142. Microsoft III, 253 F.3d at 87-88.
143. See supra Part II.A.2 (discussing Jefferson Parish).
144. An area that arguably needs further exploration in the literature is whether tying can be a successful strategy in the presence of entry barriers other than scale economies. Because the direct mechanism through which tying is potentially anticompetitive is to foreclose sales to competitors, it was natural for economic theorists to base their models of anticompetitive tying on assumptions of scale economies. However, as was suggested by Bain in Barriers to New Competition and subsequently proved more formally by Schmalensee (see the discussion in Part C.1 supra), there are limitations to the amount of market
145. In the presence of scale economies, tying is not the only strategy that might be used to deter entry. Analysis of this class of problem dates back at least to BAIN, supra note 94. For a more modern treatment, see Gilbert, supra note 95.
146. The legal test governing attempts to monopolize was first articulated by Justice Holmes in Swift & Co. v. United States, 196 U.S. 375 (1905). The test requires the plaintiff to prove intent to monopolize plus a "dangerous probability of success." See, e.g., HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY: THE LAW OF COMPETITION AND ITS PRACTICE § 6.5 at 280 (2d ed. 1999). The "dangerous probability" part of the attempt test generally requires the plaintiff to show that the defendant has market power in the relevant market. Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993).
147. For example, the firm could set prices for two products that it sells in a way that accomplishes the same effect as a tie-in. See Carlton & Waldman, supra note 102, at 17-18. If the resultant prices are not predatory, then the alternative pricing strategy is certainly legal. Moreover, the legal standard governing predatory pricing places a high burden of proof on the plaintiff. See generally Bolton, Brodley & Riordan, supra note 37 (criticizing existing standard for predation and proposing an alternative). Thus, while a per se prohibition applies to tying, the alternative pricing strategy would be treated under a test that clearly disadvantages plaintiffs.
148. Carlton & Waldman, supra note 102, at 17-18 (introducing and analyzing effects of "virtual tying" through pricing).
149. Michael L. Katz & Carl Shapiro, Network Externalities, Competition, and Compatibility, 75 AM. ECON. REV. 424 (1985).
150. See Paul A. David, Clio and the Economics of QWERTY, 75 AM. ECON. REV. 332 (1985).
151. The explanation typically given is that once typewriters with the QWERTY standard came into existence, all typists learned the QWERTY system. With all typists trained on QWERTY, typewriter manufacturers only produced QWERTY typewriters. The training of typists and the production of machines were mutually reinforcing, and no individual could break the standard. That is, of course, until people started typing almost exclusively on computers where a keyboard could easily be programmed to any more efficient standard. Arguably, the evidence against the QWERTY myth began to mount with the introduction of the IBM Selectric, which had detachable, relatively inexpensive "track balls" that could be made to different standards. Once that technology became common, the switch to a new supposedly improved standard would not require all or a substantial fraction of typists to switch altogether. If the Dvorak standard were truly superior, an individual typist could increase his typing speed (and thereby presumably command higher pay) by investing in a set of Dvorak track balls and learning the new standard. No coordination with his employer or with other typists would be necessary.
152. See S.J. Liebowitz & Stephen E. Margolis, The Fable of the Keys, 33 J.L. & ECON. 1 (1990); S.J. Liebowitz & Stephen E. Margolis, Network Externality: An Uncommon Tragedy, 8 J. ECON. PERSP., Spring 1994, at 133.
153. See S.J. Liebowitz & Stephen E. Margolis, The Fable of the Keys, 33 J.L. & ECON. 1 (1990); S.J. Liebowitz & Stephen E. Margolis, Network Externality: An Uncommon Tragedy, 8 J. ECON. PERSP., Spring 1994, at 133.
154. For example, compact disks completely replaced records, and 3.5 inch diskettes completely replaced 51/4 inch diskettes.
155. Carlton & Waldman, supra note 102, at 17-18.
156. Admittedly, the choice here is between false acquittals and false convictions. A policy that exempts virtual ties while restricting actual ties encourages firms to substitute the former for the latter and generates false acquittals. However, a policy that restricts virtual ties necessarily generates false convictions, for reasons given in the text. Moreover, legal rules that restrict price cutting must be considered especially costly, since they work against the fundamental policy of the antitrust laws. Any legal rule governing tying should be capable of handling instances of actual and virtual tying with low error costs.
157. For one economic perspective on this view, see Richard A. Posner, Antitrust in the New Economy (Univ. of Chicago, John M. Olin Law and Econ. Working Paper No. 106 (2d Series) 2000), available at http://papers.ssrn.com/paper.taf?abstract_id=249316.
158. In particular, the plaintiff should be required to show (subject to a high standard of proof) that tying is profitable to the defendant only if it has an exclusionary effect, and that the cost of tying to the defendant is likely to be recouped through its exclusionary impact. This approach is consistent with the vertical restraints test proposed by Janusz Ordover and Robert Willig. See Janusz A. Ordover & Robert D. Willig, Access and Bundling in High-Technology Markets, in COMPETITION, INNOVATION, AND THE MICROSOFT MONOPOLY: ANTITRUST IN THE DIGITAL MARKET PLACE (Jeffrey A. Eisenach & Thomas M. Lenard eds., 1999). We should note that this standard also has the substantial virtue of being equally applicable to cases of "virtual tying" through pricing (see supra Part IV.B.2), since it is a generalization of the Brooke Group predatory pricing standard.
159. See Metzler, 19 F. Supp.2d 1345 (tie between original equipment and derivative after-markets can be deemed unlawful, when the original equipment market is competitive, only if the tie-in is the result of a change in the seller's marketing policy).
160. Although these examples are obviously one-sided, one need only reverse them to see the case for the opposite argument. For example, if, in software markets, the positions of dominant firms are especially resistant to the efforts of rivals to displace them, then the cost of a false conviction relative to a false acquittal is somewhat lower, other things being equal, than the ordinary case.
161. Technological integration may have weaker foreclosure effects, given that some of these instances involve integration that does not foreclose rival sellers. For example, in Microsoft III rivals arguably were not foreclosed by the integration of Microsoft's browser and operating system, since a consumer who wanted to use the biggest rival, Netscape, could use Microsoft's browser to download Netscape's from the Web.
162. Of course, this is not true in every case. Recall that a seller's decision to integrate a browser with an operating system may facilitate the consumer's decision to use another firm's browser - by making it easy for the consumer to use the Web to download an alternative browser.
163. One might argue that there is another side of the coin: technological integration increases the base-rate probability of harm when it enhances the credibility of an incumbent firm's exclusionary threat. While this is a theoretical possibility, we believe that firms that want to tie goods contractually would generally find less risky forms of commitment than to integrate them physically.
164. The integrated pencil/eraser example also carries an important lesson for the legal standard governing technological integration. Any test that removes immunity for instances of mere "bolting together" should do so only when the bolting provides no significant benefits beyond what a consumer could gain on his own by purchasing the two goods on the market and pasting them together. In other words, the Leasco standard (see supra Part II.A.3) should be applied not with a view to the ease with which the goods can be integrated, but with a view toward the benefits consumers derive.
165. As a concrete example of this danger, return to the Caldera case (see supra Part II.A.4.b). The Caldera court applied the substantive standard of Leasco with a more stringent proof standard (significant technological improvement). In refusing to grant summary judgment, the court relied heavily on claims that the integration was technologically easy, Caldera, 72 F. Supp.2d at 1324, rather than focusing on the benefits the integration provided to consumers.
166. Put another way, there is no reason to believe that an unambiguous improvement (or "free lunch") can be had by moving to a stricter standard. Another alternative to consider is the combination of the sole-purpose test with the more demanding proof standard of Caldera. To the extent that this proof standard raises the ratio of the false conviction to the false acquittal probability, it is probably undesirable and certainly not an unambiguous improvement over the lax standard.
167. PAUL H. RUBIN, TORT REFORM BY CONTRACT 62-63 (1993).
168. See, e.g., W. PAGE KEETON ET AL., PROSSER & KEETON ON THE LAW OF TORTS § 99, at 698-99 (5th ed. 1984).
169. This is not to deny the existence of "screens" of any sort in the antitrust context. Firms that have little or no market power are effectively exempt from tying and Section 2 claims. However, the key difference is the predictability of the legal test. For the firms that are subject to the test (i.e., that may be sued), the "competitive balancing test" seems to be more uncertain than the risk-utility test in products liability law.
170. Microsoft III, 253 F.3d at 91-92.
171. Id. at 93-95 (referring in various passages to dynamic innovation in the software market).
172. See Steven J. Davis, Jack MacCrisken & Kevin M. Murphy, Economic Perspectives on Software Design: PC Operating Systems and Platforms, available at http://gsbwww .uchicago.edu/fac/steven.davis/research.
173. See Microsoft III, 87 F. Supp. 2d (No. 98-1233), Brief of Professor Lawrence Lessig as Amicus Curiae (filed Feb. 1, 2000).