Tying of services occurs where a service provider makes the purchase of one product or service over which it has market power (the "tying good") conditional on the purchase of a second, competitively supplied, product or service (the "tied good"). By tying services, a service provider can try to use market power in one market to give itself an advantage in another, competitive market. Customers who opt to buy the tied good from a competitor cannot find a feasible substitute for the service provider's tying good.
Tying is primarily a strategy to maximize profits. It can be profitable:
- Where the demands for the two products are complementary, such that end users consume both products together (for example a network subscription and local calls), or
- If the tying good is regulated and the reglated price is below the service provider's profit maximizing level. In this case a successful tying strategy would enable the service provider to increase its overall profitability by increasing the price of the tied good.
Tying will not be profitable where:
- The demands for the two products are independent, so that end users are unlikely to consume them jointly,
- The price of the tying good is already at the service provider's profit maximizing level. In this case there is no room to increase profits further, or
- The two products are consumed in fixed proportions. To maximize its profits, all the service provider needs to do is set the price for the product over which it has market power at its profit maximizing level.
A tying strategy is only likely to exclude competitors from the market for the tied good if competitors are unable to overcome the loss of sales to customers who have been successfully tied. For example this might be the case if:
- Competitors face economies of scale, so that a loss of sales causes their average costs to increase, or
- The tied good is associated with network externalities, so that a loss of sales to some customers causes other customers to drop off as well.
Even where tying does have an exclusionary effect, this may be an unintended consequence of a strategy to maximize profits.
Service bundling occurs where a service provider offers two or more services separately, but gives a discount to customers who purchase the services as a combined bundle. Bundling is typically pro-competitive and consumer friendly.
Bundling is common in telecommunications and other multiproduct industries, reflecting both cost savings from producing services jointly, and consumer preferences for service bundles. In telecommunications, local and long distance services are often bundled with services such as call waiting, call forwarding, voice mail, or Internet access.
RELATED INFORMATION
Remedies for Tying and Bundling