Bundling and Tying

1. Bundling and Tying Jen-Ying Chen Investigator Fair Trade Commission Chinese Taipei OECD-Korea RCC ,12 October,2006

2. Outlines • Focus on bundling and tying • Analysis on tying • Regulations of Fair Trade Act on bundling and tying • Case study on tying • Conclusion

3. Taipei MRT

4. The first line in Taipei

5. Why pursue Fair • Ultimatum Game: If I offer US$100 to you and your neighbor.You negotiate how to divide. If you conclude a transaction,then you receive it,or I’ll take it back. • Method to divide： • A.neighbor receives 99，you own 1。 • B.neighbor 1，own99。 • C.neighbor and you get each 50。

6. Why pursue Fair • Result：Most people choose “C”(both receive 50)。 • Question：If you choose “B”(neighbor only got 1) ,would the neighbor really refuse (you got nothing if you refuse)? • Conclusion：most people prefer to accept “fair non-benefits”to accept unfair benefits, —we pursue fair by nature

7. Focus on bundling and tying • Bundling • This term is also referred to as a package tie-in and tends to occur when one product is sold with another as a requirement for the sale. • Bundling is a form of vertical integration • Bundling of products may be a source of economies or efficiencies for the manufacturer, part of which may be reflected in a lower composite price for the buyer than if all the different products were supplied or bought separately.

8. Focus on bundling and tying Tying • Refers to situations where the sale of one good is conditional on the purchase of another good. • Tied selling is sometimes a means of price discrimination. Competition concerns have been expressed that tying may foreclose opportunities for other firms to sell related products or may increase barriers to entryfor those that do not offer a full line of products.

9. Focus on bundling and tying • Difference of bundling and Tying • complete package vs. condition of another good • bundling product is cheaper than separate products vs. sale of one product on the condition of buying another product.

10. Focus on bundling and tying • Tying arrangements • Monopoly power How could a tie-in be imposed unless such power existed? • “Leverage” theory of tie-ins 1.Tying is a method of extracting higher profits through price discrimination. 2.The courts have viewed tying as a device for extending monopoly over one product.

11. Analysis on tying • Hypothesis 1.Tying market is a monopoly Tied market is perfect competition 2.Two products are complementary • Before tying TR=TRa+TRb=PaQa+PbQb （1）

12. Analysis on tying Tied market Tying market P P MCa MCb Pb Pb’ A P’a F2 F1 Pa E1 AR1（Pa,Pb） E2 Pa MR1 AR2（Pa’Pb’） MR AR MR2 0 Q Qb’ Qb Q’a Qa

13. Analysis on tying • Extension-of-Monopoly P=MC→MR=MC • After Tying TR’=TRa’+TRb’=Pa’Qa’+Pb’Qb’ • Profit of After Tying △TR=TR’-TR=Pa’Qa’-PaQa +Pb’Qb’-PbQb （2） （3）

14. Analysis on tying • Factors that affect profit after Tying 1.Elasticity of tied product less or big→increase or decrease 2.Cross elasticity of demand of tying product to tied product less or big→ increase or decrease 3.Proportion Fix or variation→decrease or increase Profit of after tying increase

15. Regulations of Fair Trade Act on tying • Article 19-6 of Fair Trade Act No enterprise shall have any of the following acts which is likely to lessen competition or to impede fair competition: → limiting its trading counterparts' business activity improperly by means of the requirements of business engagement.

16. Regulations of Fair Trade Act on tying • The condition of constitute • Superior market power －Market power above 10﹪or economic dependence • Vertical restraint competition • Improper restriction to exclude competition in a relevant market • Affect the freedom of business transactions of its competitors

17. Regulations of Fair Trade Act on tying • FTC law prior tocriminal law • FTC Article 36 • Provisions of damage in civil law -constructive negligent for lowering the victim’s responsibility of giving evidence • FTC Article 31 • FTC Article 32

18. Case study on tying－ D company Co. Ltd.'s inappropriate tie-in sales of VCDs • Background A complaint was filed against D company (Taiwan) Co. Ltd. (D company) alleging improper sale of VCDs in violation of the Fair Trade Law. D company only allowed rental stores to make tie-in purchases and did not permit the freedom of purchasing single VCD titles. In addition, another six rental stores claimed that D company required them to also execute contracts with Columbia and Fox simultaneously. D company limits rental stores' business activity improperly by means of the requirements of business engagement. Film company VCD agency Rental stores customers MGM and distributor Columbia Fox Rental Sell-Through

19. Case study on tying • Investigation • D company argued that, as it needed to grasp market conditions for the purpose of placing orders with VCD manufacturers, it initially executed contracts for package sales with stores to learn about the quantity demands before producing additional quantities for single purchases. This argument, however, made it even clearer that when D company first approached its customers, it only allowed customers to make tie-in purchases and did not allow the freedom of purchasing single VCD titles.

20. Case study on tying • Investigation Rental stores risked an inability to purchase D company products if they failed to execute such contracts. Even if D company did provide opportunities to purchase single VCD titles later, rental stores would nevertheless be forced to enter into contracts for package purchases to secure their VCD source out of concerns for adequate VCD supply. D company argued that it provided different packages of titles in varying quantities as well as discounted prices, allowing rental stores to designate quantities for different individual titles within the total quantity of each package.

21. Case study on tying • Investigation D company denied this and argued that contracts with these two companies came into force at different times. The rental stores however clearly explained that D company imposed such requirement on stores that had not execute Columbia contracts only after Fox launched a contract system. Of the four rental stores that were not subjected to this arrangement, two were large chains that were allowed to purchase individual titles, and one was the franchise store for which contract with D company had been negotiated by its parent company. The remaining store had negotiated the two contracts in question with different agents. D company indicated that these two agents had assumed all liability for their conduct. This testimony, however, did not constitute persuasive counter-evidence .

22. Case study on tying • Investigation • D company also asserted that in addition to the rental editions of VCD titles, rental stores could purchase the direct-sales editions of VCD titles. However, the rental and direct sales editions of each VCD title are released at different times. Therefore, the rental stores cannot know in advance whether a given title will be issued in a direct-sales edition, because the decision is in the hands of the distributor. As a result, rental stores may be forced by customer demand and market competition to buy the rental edition.

23. Case study on tying • Findings of Fact • The Fair Trade Commission found that of the 12 rental stores doing business with D company, a total of eight maintained that D company provided only tie-in sales of VCD titles,and prohibited purchase of single VCD titles. • The Commission also found that D company's contracts and catalogs did not list purchase or sales prices of single VCD titles. Although three other rental stores stated that D company allowed them to buy single VCD titles, two of them were large chain stores with large business operations that entailed sufficient bargaining power, allowing them to purchase single VCD titles or negotiate purchase price in business transactions . The remaining store was subject to a contract executed by its headquarters, placing it in a situation substantially different from franchise or independent rental stores doing business with D company.

24. Case study on tying • Findings of Fact • While D company did provide evidence on sales of single VCD titles, it appeared that parties to such transactions were mostly large chain stores. Only a very small minority of the remaining rental stores was occasionally allowed to buy one or two VCD title(s). The situation is entirely different with the chains, which were able to purchase in varying quantities. • Even if D company's most recent claim-that it now sells all MGM VCDs on single-title basis-is true, this new sales arrangement does not alter the fact that it previously sold Columbia and Fox titles through tie-ins.

25. Case Study on Tying Conclusion of Law 1 D company did not offer rental stores a reasonable opportunity to purchase single titles. Because D company is the exclusive agent in Chinese Taipei for Warner Brothers, Fox, Columbia, MGM, and BBC, rental stores did not have other legal channels through which they could source VCDs produced by these studios. • Moreover, D company's market power places it at an advantage situation. Rental store owners stated that D company is the largest distributor of VCDs. According to rental store operators, D company is also apparently the market leader in terms of orders for audio-visual products from distributors. This demonstrates that D company is the market leader in VCD sales volume and customer satisfaction. • Thus the Commission determined that the acts by D company obstructed fair competition in violation of Article 19-6 of the Fair Trade Law and imposed a fine of NT$1.25 million.

26. Competition vs. monopoly Welfare loss caused by tying Deadweight loss—triangle ABS The deadweight welfare loss is a measure of the dollar value of counterpart business’s surplus lost (but not transferred to suppliers)as a consequence of a price increase. （RSPc－RABPc） The monopoly profit (rectangle ABPmPc )provides monopolist with an incentive to use the tying arrangement to gain more profit. Through such anact increases its own profit ,but it causes deadweight loss in society. Evidence of harm-view from economic analysis R A S Pc B Qm Qc

27. Evidence of harm and rule of reason • Rule of reason: • Counterpart business pays more after tying arrangement • In the long run, the counterpart business will leave the market • Increase the barrier to entry of the counterpart business • Tying arrangement restrains or impedes competition • Deprive freedom of choice of the counterpart business

28. Conclusion • Anti-competitive effects are only likely where inter-brand competition is weak and there are barriers to entry at either producer or distributor. • If the action decreases competition, it should be determined from the standard whether or not the method is reasonably "likely to impede fair competition". • Illegal per se vs. rule of reason • Popular product tie-in vs. unpopular product or new product tie-in vs.old product

29. Conclusion • Taiwan’s experiences • Case 1：Data Storage Media Units Manufacturing and Reproducing －game software tie-in (the 534th Commissioners' Meeting) • Case 2：Entertainment Industry-VCD tie-in (the 307th Commission Meeting) • Case 3：Broadcast and Television Industry- KTV videotapes tie-in (the 211st Commission Meeting)

30. About TFTC • The Fair Trade Law of the Republic of China (ROC) was enacted by the Congress on February 4, 1991 and The Fair Trade Commission (FTC) was established on January 27, 1992 and is under the jurisdiction of the Executive Yuan (the Cabinet). • The FTC is the central competent authority in charge of competition policy and Fair Trade Law in Taiwan. • The aim of the law is to maintain trading order, protect consumer interests, ensure fair competition, promote economic stability and prosperity, and provide fair and reasonable competition rules. • The FTC can be generally be divided into the Commissioners’ Meeting and the following departments and administrative supporting offices: First Department, Second Department, Third Department, Department of Planning, Department of Legal Affairs, Secretariat, Personnel Office, Accounting Office, Statistical Statistical Office, and Civil Service Ethics Office.

31. Thanks for your attention jenying@ftc.gov.tw Chairman of CTFTC