Economics of Regulation

1
Economics of Regulation

• Vertical Restraints

2
Tie-In Sale

• Definition
• Sale of good X is conditional on the buyers
  promise to buy good Y. (IBMs selling punch
  cards with computers).
  

3
Tie-In Sale

• A. Antitrust Objections
• 1. Can be used to exclude or foreclose small
  sellers from a particular market. (Cable company
  requiring wiring done by them.)
  
• 2. Monopolist is able to extent its power into
  another market. (Kodak selling film wit
  processing FREE.)
  
• continue

4
Tie-In Sale

• 3. Creates barriers to entry, since entrant would
  have to sell both products.
  
• 4. Aids cartel discipline. One way to cheat is
  to discount a related product. If products are
  bundled, this option is not available.
  
• 5. Aids price discrimination by metering. (IBM
  with punch cards XEROX with paper and toner.)
  

5
Tie-In Sale

• B. Legal Treatment
• 1. Section 1 prohibits it but is not explicit.
• 2. Section 3 of Clayton Act...It shall be
  unlawful ... to lease or sell goods...on the
  condition, agreement or understanding that the
  lessee or purchaser thereof shall not use or deal
  in the goods...of a competitor or competitors of
  the lessor or seller, where the effect...may be
  to substantially lessen competition or tend to
  create a monopoly in any line of commerce.
• 3. Tie-ins are almost illegal per se

6
Exclusive Dealing - firm X sells to Y on the
condition that it accepts no goods from Xs
competitors.

• A. Antitrust Objections
• 1. Market foreclosure
• 2. Inhibit entry
• B. Legal Treatment
• 1. Rule of Reason - same Section 3 of Clayton
  Act
  

7
Vertical Restraints

• A. Resale Price Maintenance - producer specifies
  the prices that wholesalers or retailers may
  charge when reselling the producers product.
  
• B. Exclusive Territory - wholesaler or retailer
  is granted a certain geographic region where only
  s/he can resell.
  

8
Vertical Restraints

• C. Anti-efficiency motives - cartel of retailers
  or manufacturers
  
• D. Pro-efficiency motives - expert sales staff -
  dont want people going across the street after
  salesperson at another store spent 3 hours
  helping a person decide which model to buy.

9
Baldwin article

• Structure, Conduct, Performance are not three
  independent measures. We all recognize that
  structure can lead to some conduct problems, but
  Baldwin argues that there is a feedback effects
  such that certain conduct can lead to certain
  structure, i.e. tie-in sales may need monopoly
  power but the conduct itself will lead to more
  monopolization in structure.