For Innovation's Sake, An Open Window: The Microsoft Ruling Unties Some Knots

Competition Policy and Antitrust

Article Snapshot

Author(s)

Robert W. Hahn

Source

AEI-Brookings Joint Center Policy Matters 01-21; A version of this article appeared in the Washington Post on July 15, 2001

Summary

This paper looks at whether firms can combine two products to sell together (“tying”).

Policy Relevance

Firms need to be able to add new features to products and combine them to innovate, and it hurts consumers to punish this common practice.

Main Points

  • Tying is when a firm requires customers to purchase product B when they buy product A. Bundling is when a firm encourages customers to buy both, perhaps by offering a discount.

  • The lower court judge, Judge Jackson, ruled that Microsoft broke the law by adding its Internet browser to its Windows operating software.

  • The appeals court judges rejected this. They came closer to economists’ consensus that, at least sometimes, bundling and tying are good for consumers. Nobody objects when car companies offer factory-installed air conditioners.

  • In the new economy, consumers can benefit from tying by large, dominant firms, because these firms can easily add features to networks that everyone uses.

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