Joint Production and Monopoly Extension through Tying

The case law on tying arrangements, i.e., the conditioning of the purchase or sale of one product on the purchase or sale of another, has developed in light of a fear that the tying firm will use its power in the for the tying product to create monopoly power in the for the tied product. This case law follows the Sherman Antitrust Act, prohibiting contracts in restraint of trade and monopolization, and Section 3 of the Clayton Act, prohibiting the imposition of restrictions against using or dealing in a competitor's product where the effect may be to lessen competition or tend to create a monopoly. For example, in International Salt Co., an agreement tying the purchase of salt products from International to the use of International's patented salt product machines was ruled illegal because the Supreme Court found that the monopoly power conveyed through the patent on salt machines was being used to restrain trade in unpatented salt [8, 395; 14, 424]. Later, in Northern Pacific Railway Co., the Supreme Court found that Northern Pacific's contracts requiring purchasers or lessors of land adjoining its railway to use its railway to ship all goods produced on these lands were illegal. The major principle underlying this decision was that [tying arrangements] deny competitors free access to the for the tied product, not because the party imposing the tying arrangement has a better product or a lower price but because of his power or in another market [11, 6; 14, 288]. The illegality standard for tying became the combination of power in the tying product and an effect on a substantial volume of commerce in the tied product. In his dissent in a later decision finding that U.S. Steel illegally tied the construction of prefabricated homes to loans, Justice White said There is general agreement in the cases and among commentators [footnote to references omitted] that the fundamental restraint against which the tying proscription is meant to guard is the use of power over one product to attain power over another ... [7, 512].' Recent economics literature has exhibited much skepticism regarding the leverage