Why Tie a Product Consumers Do Not Use?

Competition Policy and Antitrust

Article Snapshot

Author(s)

Dennis Carlton, Joshua Gans and Michael Waldman

Source

NBER Working Paper 13339, 2008

Summary

This paper looks at a possible reason why Microsoft combined its Media Player with Windows.

Policy Relevance

Pre-installation of products can be a business strategy that improves profits but entails antitrust risks.

Main Points

  • “Tying” is when a firm requires customers to purchase product B when they buy product A. Microsoft “tied” its Media Player to Windows by sending out the Media Player free with Windows.

 

  • Antitrust law often assumes that tying can hurt consumers. Economists now agree that tying can benefit consumers by reducing  costs, so courts now accept the argument that tying can be legal.

 

  • Why would Microsoft tie Media Player to Windows? One answer is that by doing so, Microsoft can force down the price that rivals charge for a competing media player. To convince a consumer to buy its rival media player, a firm has to price low enough and produce a high enough quality product so that the consumer prefers the rival product to the “free” installed Media Player.

 

  • Microsoft can charge a high price for Windows if the rival media player is both high quality and low price, since consumers buying Windows will benefit from the rival media player, but will obtain this benefit only if they purchase Windows. 

 

  • The tie benefits Microsoft even when consumers do not use Microsoft’s Media Player because the tie raises the price of Windows. The tie is socially inefficient: it winds up hurting the rival, but does not exclude the rival from the market.

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