Product Tying

Under product tying, buyer of one product is obligated to buy a related (usually complementary) product from the same supplier. In 1980s, customers who leased IBM computer had to buy paper computer cards made by IBM. Similarly in 1950s, customers who leased Xerox copying machine had to purchase paper from Xerox. The seller may charge reasonable price for the major product and collect monopoly profits on the lower complementary product. Product tying is undertaken for several reasons.

1.       Tying is done to maintain quality control and protect the brand name. Sometimes an inferior good can be used as a complementary good.

2.       Efficiency in distribution can be achieved if there are savings to the company by achieving a total lower cost in delivering both the products.

3.       Evasion of price controls is possible. If there is a ceiling price on one of the two products, then selling the second product at a higher price will circumvent the control.

Courts intervene to forbid restrictions on competition arising from product tying. For example, McDonald's was forced to allow franchises to purchase raw material and supplies from any McDonald's approved supplier rather than only from McDonald's. This increased competition and ensured quality and protection of brand name. 

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