By Yong Chaw & Babu Nahata, University of Louisville
This paper examines the relationship between tying and vertical integration when an input monopolist can require its downstream buyer to purchase a competitively supplied input from it, or integrate forward in the downstream market. We show tying is an imperfect substitute for vertical integration, and provide the necessary and sufficient condition when the two practices are equivalent. When they are not equivalent, the total welfare under tying is higher than that under vertical integration. This raises the question whether a harsher treatment of tying than vertical integration in our current antitrust enforcement is economically sound. More interestingly, compared with the non-tying case, tying can be Pareto improving: Both the input monopolist and consumers are strictly better off when no other firms are worse off. Further, we offer the necessary and sufficient condition for Pareto improvement. Finally, we argue that, considering the welfare effects of tying, more cautions need to be taken in treating Apple’s payment restriction in the ongoing antitrust case Epic Games v. Apple.
