Friday, June 4, 2010

Poll: Why do firms tie in sales?

An interesting topic in industrial organization / antitrust economics is what to do with firms who tie in sales of one product to sales of another. There are plenty of examples of tying in sales. Here are just a few:

1. Getting around regulation. Unfurnished apartments in a rent-controlled market (see my price ceiling article) are not allowed to have rent above some set amount, whereas furnished apartments can charge higher rents. This leads to tying in: An apartment with a dumpy recliner is a furnished apartment.

2. Efficiency Considerations. To tie in a sale, the firm must bundle two or more distinct products into one package to be sold together. If the products are sold together, what does it mean for these distinct products to be products? For concreteness, is a car a product or a bundle? It probably makes sense to think of the car as a bundle of products, but these products are efficiently tied together. After all, who would want to buy a car component-wise?

3. Price Discrimination. Tying in sales allows the firm to effectively charge different prices to different consumers based on willingness to pay. Take an old example, the IBM case, where IBM (then a supplier of tabulating machines) tied the sale of its IBM punch cards to the purchase of their IBM tabulation machines. By so tying the sales and marking up the punch cards, IBM could effectively charge a higher price to intensive users of the machines. These high-intensity users presumably have a higher willingness to pay for tabulation machines. Therefore, charging a higher price to these users makes economic sense.

Another (potential) case of price discrimination through tying is the iMarket. By tying the Apple suite of products to the iTunes and iBooks markets, Apple can effectively charge a higher price to consumers who have the highest demand for all of the iStuff. Thus, even though the iDevice costs the same to an intense iUser as a casual iUser, the intensive consumer pays a higher price (through buying more iStuff that has a supplemental markup built in).

4. Strategic Tying. This is the type of tying that got Microsoft into trouble. Tying sales can be a successful anti-competitive strategy. One reasonable interpretation of Microsoft's antitrust harms is that they used tie-in sales to foreclose small companies (like Netscape) from building a viable competing suite of applications to Microsoft's application software suite. Down the road, such a suite could have been the basis for a fully-competitive operating system environment to Microsoft OS.

Anticipating this, Microsoft tied Internet Explorer and other applications to the sale of its operating systems. To the extent that this foreclosed opportunities for rivals to enter, Microsoft's strategy of strategic tying worked. Indeed, Microsoft remains a large and successful corporation. Yet, at this point, one might wonder if Microsoft's position has already eroded to such forces as web-based applications.

Each of these broad topics is interesting in itself, but my question for this week is:

Which of these reasons for tie in sales is most important?

(a) Circumventing Regulation.
(b) Efficiency
(c) Price Discrimination.
(d) Strategic tying.

The poll is open for a week, so vote early and often. Ask your friends to vote. I would love to -- on a condition of reading this post -- tie you into an obligation to vote on this poll, but I don't have that sort of power. Please vote, anyway. I'm interested in hearing what you have to say.

1 comment:

  1. Final Tally:

    13 votes for Price Discrimination
    9 votes for Efficiency
    2 votes for Circumvent Regulation
    6 votes for Strategic Tying


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