Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Tuesday, August 7, 2007

Unfit to Be Tied: An Analysis of Trident v. Independent Ink

Posted by D. Daniel Sokol

Nalebuffb Barry Nalebuff of Yale's School of Management always has something interesting to write.  In his most recent working paper, Unfit to Be Tied: An Analysis of Trident v. Independent Ink, he analyzes how to address tied sales by a firm with a patent.  He argues that a per se rule for tying  in such cases is valid.

ABSTRACT: In Illinois Tool Works and Trident v. Independent Ink, the Supreme Court overturned its longstanding per se rule against tied sales by a firm with a patent. Henceforth, market power will have to be demonstrated, whether or not the firm has a patent. Upon such demonstration, a tied sales contract will still be a per se antitrust violation. Our review of the case raises the question of why firms engage in tied sales and what is the antitrust issue. While the courts have focused on the leverage of market power, this case suggests a different concern: with complementary goods (such as a printer and ink), tying is used to engage in price discrimination via metering. The antitrust issue is that consumers will be harmed because the firm, by metering, is able to be a more effective monopolist and thereby extract more of the consumer surplus. And while perfect price discrimination may be efficient, there is no presumption that more imperfect price discrimination improves efficiency. As for the legitimate objectives, such as risk sharing, they can be met via direct metering. This suggests the wisdom of maintaining the per se rule against tied contracts when market power has been demonstrated.

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Based on what Professor Nalebuff says in the abstract, it seems like a very aggressive policy prescription, i.e., "Metering has ambiguous welfare effects and therefore should be per se illegal." By that standard, all mergers (horizontal and vertical), joint ventures, volume discounts, and vertical restraints would be judged per se illegal.

Posted by: | Aug 7, 2007 1:21:44 PM

The guy's amicus brief said the same thing. Kathleen Sullivan, arguing the plaintiff's case before the Supremes, tried to refer to it but was shot down (the transcript can be googled). Nalebuff's brief wasn't referred to at all in the final judgment. Basically, the guy has become a bit loopy on this tying/bundling stuff and has gradually lost his once-great credibility in the antitrust policy and enforcement circles that matter (both in the US and Europe). I can't work out whether he realizes that yet.

Posted by: | Aug 8, 2007 12:19:25 AM

Regardless of the merits of Professor Nalebuff's arguments, a rejoinder that the Supreme Court shot down his argument and that his arguments no longer have credibility in "antitrust policy and enforcement circles that matter" is intellectually irrelevant. In the early 1960's, the exact same points could have been made about the nascent arguments of what came to be known as the Chicago School of Antitrust Law and Economics. Back then, those arguments had no traction in enforcement or policy circles and were constantly being shot down by the Supreme Court. Those facts did not go to the merits of the Chicago School arguments 40 years ago, and similar facts do not go to the merits of Professor Nalebuff's views today.

Posted by: Harry Gerla | Aug 8, 2007 8:49:33 AM

Reply to comment 1:

Your summary of the abstract is not accurate. The current state of the law is that tied sales by a firm with market power are per se illegal. I am proposing that we maintain this status quo. I have observed that the motivation for many tied sales is metering. Whether we should change the antitrust law in light of this fact is the point to the paper. It is hard to see how defending the status quo is a "very aggressive policy prescription."

Reply to comment #2

The paper is clear that the Supreme Court rejected the argument in my amicus brief. Indeed, I was spared a 9-0 decision only by the fact that Justice O'Connnor had stepped down. Whether or not the court referred to my argument is hardly relevant to their merits. That said, the person has the facts wrong. Justice O'Connor brought up my brief during the oral argument. And the court explicitly refered to my brief on the bottom of page 14 of their decision.

Is this blog populated by people who read neither the paper nor the decision?

Posted by: Barry Nalebuff | Aug 8, 2007 12:56:45 PM

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