Introduction
The issue is to critically discuss the proposition that the fundamental objection to tying and bundling by dominant businesses is the ‘leverage’ of market power from a primary market to a secondary market. This essay will argue that the statement is largely accurate. The main concern for competition authorities is indeed the ability of a dominant undertaking to use its power in one market to foreclose competition in another. However, this view must be qualified, as tying and bundling are not automatically unlawful and can, in some cases, produce efficiencies that benefit consumers. The analysis must therefore be effects-based.
The Legal Prohibition on Tying and Bundling
Competition law does not make it illegal for an enterprise to have a dominant position. However, a dominant enterprise has a ‘special responsibility’ not to allow its conduct to impair genuine, undistorted competition (Hoffmann-La Roche & Co. AG v Commission of the European Communities, 1979). In the UK, this principle is enforced through Chapter II of the Competition Act 1998 and Article 102 of the Treaty on the Functioning of the European Union (TFEU), which prohibit the abuse of a dominant position.
Tying is where a supplier makes the purchase of one product (the tying product) conditional on the purchase of a second, distinct product (the tied product). Bundling is the practice of selling two or more separate products together in a package. Article 102(d) TFEU specifically lists as a potential abuse making “the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.” For tying to be considered an abuse, several conditions must be met. The undertaking must be dominant in the market for the tying product, the tying and tied products must be two separate products, customers must be coerced into buying the tied product with the tying product, and the practice must be capable of restricting competition (Microsoft Corp v Commission, 2007).
Leverage and the Foreclosure of Competition
The statement correctly identifies leverage as the principal objection to tying. Leverage theory posits that a firm can use its dominance in the tying market as a lever to increase its sales and market power in the tied market. This harms competition by foreclosing rivals in the tied market. Competitors are excluded not because their products are of lower quality or higher price, but because consumers are effectively denied access to them due to the dominant firm’s tying strategy.
The case of Microsoft Corp v Commission (2007) is a clear illustration of this principle. Microsoft was found to be dominant in the market for PC operating systems (OS). By bundling its Windows Media Player (WMP) with its Windows OS, Microsoft ensured that WMP had an unrivalled distribution advantage. Competing media player producers, such as RealNetworks, could not compete on an equal footing because most consumers received WMP automatically with their OS. The European Commission found that this practice created a foreclosure effect, deterring innovation and reducing consumer choice in the media player market. The dominant undertaking, Microsoft, was effectively able to project its power from the OS market into the separate media player market, harming competition there. This conduct shifts the basis of competition from merit to the exploitation of existing market power.
Potential Efficiencies and Justifications
Nevertheless, tying and bundling practices should not be condemned outright. A more nuanced analysis recognises that they can sometimes be objectively justified or generate efficiencies. For instance, bundling products can lead to cost savings in production, distribution, and marketing, which may be passed on to consumers in the form of lower prices. It can also reduce transaction costs for consumers and ensure the quality and compatibility of complementary products, improving the user experience (Whish and Bailey, 2021). For example, selling a mobile phone with its specific charger could be seen as a tie that ensures technical performance and safety.
Competition authorities are therefore required to conduct an effects-based analysis, balancing the potential anti-competitive foreclosure effects against any claimed efficiencies. To be successful, a justification must demonstrate that the benefits outweigh the negative impact on competition and that the tying practice is necessary to achieve those benefits. If the dominant firm can achieve the same efficiencies through less restrictive means, the tying conduct is likely to be deemed an abuse.
Conclusion
In conclusion, the statement that the basic objection to tying and bundling is the leverage of market power is fundamentally correct. The core concern within UK and EU competition law is that a dominant firm can unfairly foreclose competition in a secondary market, thereby harming consumer welfare and distorting competition on the merits. The *Microsoft* case provides a powerful example of this anti-competitive strategy in action. However, the analysis is not this simple. The modern approach requires a careful balancing act, weighing the proven anti-competitive foreclosure of a tie against any legitimate efficiencies it may create. Therefore, while leveraging market power is the primary objection, it is the resulting negative effect on competition, after considering all circumstances, that ultimately renders the practice unlawful.
References
- Competition Act 1998, c. 41.
- Consolidated version of the Treaty on the Functioning of the European Union [2012] OJ C 326/47.
- Hoffmann-La Roche & Co. AG v Commission of the European Communities (Case 85/76) [1979] ECR 461.
- Microsoft Corp v Commission (Case T-201/04) [2007] ECR II-3601.
- Whish, R. and Bailey, D. (2021) Competition Law. 10th edn. Oxford University Press.
