When we talk about tying, it refers to the strategy of a firm that sells two different goods in a consignment. Thus the seller demands that when a consumer buys product A, he must also buy product B. With Windows 95, and especially with Windows 98, Microsoft has tied its Web browser, Internet Explorer (IE), to its operating system. Indeed, customers could not get Windows 98 without also getting Internet Explorer.
More recently, in 2000, the Commission accused Microsoft of violating competition rules particularly Article 82,''for having abused its market power by tying its Windows Media Player (WMP) with the Windows operating system present on virtually all PCs in the world.'' Indeed, the law prohibits a company to make the purchase of product B a condition for the purchase the A if it substantially lessens competition''. With IE, the appeals court ultimately ruled that Microsoft was practicing integration, which is lawful, and not tying.
By contrast, in the second case, Microsoft offered a version of its operating system which does not include WMP. The effect of this measure taken by the Commission is now that consumers will decide for themselves whether they want to buy Windows with the drive or whether they will add to it other reading software for sound files and video.
The Commission believes that this practice has several negative effects on economic efficiency and individual well-being of consumers:
- The weakening of competition in the market for media players
- A brake on innovation pervasiveness
- WMP resulting in reduced incentives for creators of musical, film and other media companies, as well as software developers and content providers to design products for competing media players.
- The reduction in consumer choice disadvantaging competing products for reasons that have nothing to do with quality or price.
Microsoft defends itself against accusations of anticompetitive practices, and justifies its practice of bundling by a simple argument for efficiency and the fact that this is a real advantage in terms of price and service to the consumer. Faced with this problem, economic theory will help determine whether the practice of tying of Microsoft (we will focus on the case Windows and IE) was performed under ''innocent' motivations" i.e. that its decision to link has not been affected by the possibility that competing firms are excluded from the market, but rather a search for efficiency in terms of cost and quality or whether this was actually tying for anticompetitive purposes.
Microsoft outlines reasons that are not binding and anti-competitive and trying to prove unfounded accusations of the tribunal. It is not tying itself that is condemned, but its ability to exclude competitors from the market. The physical bundling is everywhere: most goods are from a production process that can be seen as a process of linking physical inputs with each other and this creates a product of greater value.
In addition, Microsoft did not see any difference between the integration of IE into Windows and other integration features in Windows previously made.
Tags: Web browser, Internet Explorer, Windows 95, Windows 98, Windows Media Player, economic efficiency, cost and quality,
[...] Therefore it excludes the tying competitors. In the new economy, however, there are goods with low marginal production costs (but high fixed costs). Prices around the marginal cost do not allow market participants to recover their high fixed costs. Plus the ability of competitors to differentiate their product in the tied market is large, the lower the impact on the ability of rivals to compete. In a case of tying, consumers who receive free C will pay for 'only if adds value, which corresponds to the specific needs and offer innovative features. [...]
[...] Thus, one can, for example, sell cheap razors but catch up on the sale of blades. So setting a low price on competitive goods is not very different from tying two goods together (especially if the product has no value bound when not bundled with the other product) and therefore bundling can be considered a legitimate response to pricing in a competitive environment. D. Bundling can save costs in terms of compatibility and protect intellectual property rights By linking two assets, the monopoly does not need to make a base product consistent with all other complementary goods on the competitive market. [...]
[...] – lS The firm decides to tie up when D 0 i.e. when the positive outweighs the negative. Note that D = 0.The reason is that when l = the incumbent cannot extract surplus from the entry cost of a single component in the absence of tying. Thus the effect of price squeeze in the bundling is non-existent, and the tying is only a positive effect on the profit of the firm owner. In the other extreme case l = on the contrary, we have D = [...]
[...] Without tying there are several possibilities to stage pricing, depending on the result of step R & D. When, for example, the two companies succeed in the two components, the prices are driven to marginal cost and firms make zero profit. If, on the other hand, the two companies succeed in a single component, the result of the market depends on success in the same or different components. If it is in the same component, say the owner can get the full value of innovation practicing perfect price squeeze in A. [...]
[...] It is irrational for a firm to use product bundling to extend its monopoly to a 2nd market and exclude competitors: Criticism of the Leverage Theory Suppose a firm with a monopoly on good vA marks the willingness of the consumer to pay for A and CA is the cost of production. The consumer also consumes a good which is a competitive market. Let VB be the willingness of the consumer to pay for B and CB the cost of production of B. Does the producer gain by linking A and The consumer will buy the linked products if the price of the lot is [...]
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