Sherman Act - Product Tying - Explained
What is Product Tying?
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What is Product Tying?
Under the Sherman Act 1, as well as 3 of the Clayton Act, tying the purchase of one product to the purchase of another competitors product may be anticompetitive and a restraint of trade. Tying, in its most basic form, is when a seller requires that a buyer agree that if seller sells product A, the buyer can only buy product B from the seller (or another identified seller). In order to be illegal, this practice must have a substantial impact on trade or commerce. To have a substantial effect on trade, a seller must generally hold substantial market power.
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When is required for a product tying arrangement to be illegal?
As such, a tying arrangement must generally have the following elements:
- 2 or More Products - The sale of one product, the tying product, is tied to the buyer also purchasing a separate product - the tied product.
- Coercion - Buyers are coerced by the tying relationship to purchase the tied product.
- Market Power - The defendant must have substantial market power in the tying product.
- Commercial Impact - The tying arrangement forecloses a substantial volume of commerce in the tied product (affects competition).
Tying situations are very common when a company sells an industry-leading product and also sells accessories to that product.
Example: ABC Corp is the only seller of a specific type of farm equipment. 123 Corp also sells an attachment to ABCs equipment that is sold by a number of other firms in the market. ABC requires that anyone buying the piece of equipment must also purchase the attachment from 123. This is product tying and may be a restraint of trade.
Tying arrangements are generally not considered a naked restraint of trade. If the above elements are present, a court will examine to see if there are any pro-competitive justifications for tying.
What are Pro-Competitive Justifications for a Tying Arrangement?
Examples of pro-competitive justifications include:
- Product Quality - The seller may claim that selling the products together ensures functionality or quality of operation. This argument may be effective when operational effective relates to the company's brand or strategic position.
- Single Product - A seller may be able to demonstrate that the two items should be treated as one single product. For example, it is sensible for a car manufacturer to include wheels and tires on a vehicle when selling it to dealers.
How do you feel about tying relationships between products? Should these arrangements be illegal? Why or why not? Does it affect your opinion if the tied products are sold by the same seller? Are you convinced by the competitive justifications for tying arrangements?
ABC Corp sells a particular type of widget. The widget is compatible with components sold by lots of other vendors. ABC Corp requires that any purchaser of an ABC Corp must also purchase an ABC component. What factors will the court review in determining whether this situation is illegal?