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Friday, September 17, 2004

The Sinister Practice of Bundling
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I subscribe to NERA Weekly, an e-mail newsletter from the economic consulting firm NERA about what its experts are doing. This week's edition highlighted a talk by Dr. Mark Williams of NERA about the economic effects of bundling:

In his presentation, Dr. Williams pointed out that a cautious enforcement approach towards bundling may encourage firms with anticompetitive motives to implement their agenda through bundling, rather than a more "clear cut" abusive practice.

"There are not many general rules in the analysis of bundling. Yet, bundling allegations merit careful investigation as the effects on competition can be very large indeed," said Dr. Williams. "The Chicago Critique only applies under particular assumptions."

Dr. Williams illustrated the possible anticompetitive effects from bundling that recent developments in economic analysis have identified. He pointed out that bundling can be used to raise barriers to entry as well as to exclude rivals by creating artificial economies of scale. Said Dr. Williams: "Many types of abusive behavior can be replicated by bundling."

Now, I grant that Dr. Williams is light years smarter and more precise than I could ever be with these microeconomic questions about the benefits and harms of bundling. And neither did I attend his talk, so can imagine how a press release account of it would miss most of the nuance. Nevertheless, can you imagine a antitrust or regulatory regime premised on the notion that all bundling is subject to the "rule of reason"?

If bundling can have anticompetitive effects and can be used to erect entry barriers, then all attempts to bundle are worthy of regulatory scrutiny and economic analysis.

Think of a historical instance of the approval process: "Dear Antitrust Division, Please take note that I, Henry Ford, would like to manufacture something called an automobile. This auto consists of a bundle including: a frame, engine, tires, windshield and horn. The pro-competitive effects will be.... I promise not to create any artificial economies of scale. Please allow me to bundle this product. Sincerely, H.F."

And, indeed, this absurdity is not too far from what the EU wants to do with Microsoft in the antitrust action or what folks routinely urge the FCC and state commissions to do with communications bundles. Simplicity and administrability are the two cardinal virtues of U.S. antitrust law, at least after the Chicago school revolution. Efforts of fine-minded economists to lose those bright-lines by turning interesting academic questions into litigable ones should be resisted at every turn.

posted by Ray Gifford @ 10:31 AM | General

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