The Welfare Effects of Metering Ties

Abstract

Critics of current tying doctrine argue that metering ties can increase consumer welfare and total welfare without increasing output and that they generally increase both welfare measures. Contrary to those claims, we prove that metering ties lower consumer welfare and total welfare unless they increase capital good output. We further provide conditions under which metering ties always harm consumer welfare for all uniform and lognormal distributions of consumable usage rates. Finally, we show that with a lognormal distribution, metering ties also lower total welfare absent a large dispersion in desired usage of the metered good. These findings support current tying doctrine, which presumptively condemns ties with market power absent proof of an offsetting procompetitive justification. JEL Codes: C72, K21, L12, L40, L41, L42.

Do tying, bundling, and other purchase restraints increase product quality?

“…However, consumers are unconstrained in the amount of the non-durable they consume. This model of tying is often called "metered tying" because the level of consumption of the non-durable good can serve as a meter for how much consumers value the durable good (see for example Elhauge and Nalebuff, 2014). 12 However, in our representative consumer setting, we can ignore price discrimination as a motive for metered tying.…”

“…12 An important benefit to the firm of metered tying is that it facilitates price discrimination. Elhauge and Nalebuff (2014) show in general that metered tying can only increase social welfare if it leads to greater sales of the durable good. In our example, metered tying is procompetitive because it increases unobservable product quality of the durable, increases total sales of the durable, and increases total welfare.…”

Intellectual property and competition

“…In most cases consumers as a group are better off, although high intensity consumers may be injured . While such ties may reduce welfare if the firm has an absolute monopoly in the tying product and the tie reduces output (Elhauge & Nalebuff, 2017), they clearly increase welfare in cases where the seller is not a monopolist or in collusion with the other sellers in the market. In such cases any purchaser required to pay a monopoly price will purchase from a different seller (Hovenkamp, 2018a).…”

Bundling and quality assurance

“…Fang and Norman () generalize these results. Elhauge and Nalebuff () (and others) argue that bundling or tying facilitates price discrimination because firms can use consumption of tied nondurable goods as a proxy for consumers' valuation of a durable good.…”