Concepts in Industrial Organization: Tying Agreements and Antitrust Cases Regarding Them

Tying agreements bundle two products together - typically a more desirable product and a less desirable one. Tying occurs most frequently in the intermediate stages of the hierarchy of production. That is, producers between the stage of raw resource extraction and the stage of retail will often bundle products together as a condition of selling them to their buyers in the next stage of production.

The conventional wisdom regarding tying is that it can sometimes bring about undesirable consequences but is acceptable and harmless in most cases. Under current antitrust laws, there exists a rule of reason approach to tying. Courts have often condoned tying agreements when either of the following conditions held.

1. Tying was considered necessary for technological reasons.

2. Tying was necessary to maintain the high quality of a particular brand name.

Three major cases in antitrust history have dealt with tying agreements.

The American Can Company Case (1950)

The American Can Company and Continental Can Company manufactured can-closing machinery and, via tying agreements, mandated that their customers purchase cans from them as a condition of purchasing the can-closing machinery. The courts ruled against this practice due to worries regarding the prospect of foreclosure, where firms "downstream" the structure of production in this market would have trouble finding suppliers of their inputs or where firms "upstream" the structure of production would have difficulty finding buyers for their products. The courts feared that the practices of American and Continental would foreclose the market to either buyers or sellers.