Tying arrangement

From CEOpedia | Management online

A tying arrangement is a type of vertical restraint used in business agreements. It is a form of market foreclosure which occurs when a supplier or seller requires that a customer purchase one service or product as a condition of purchasing another service or product. In other words, the seller requires that the buyer tie or link the purchase of two different products or services together.

Example of Tying arrangement

For example, a company may require that in order to purchase a certain product, the consumer must also purchase a second service or product from the same company. This can be seen in the telecommunications industry where companies may require that customers purchase bundled services, such as internet and television, or mobile and landline services.

The purpose of tying arrangements is to limit consumer choice and limit competition by creating a barrier to entry for other companies. This type of arrangement is generally seen as anti-competitive and is frowned upon by antitrust authorities.

In order to be considered a tying arrangement, the following conditions must be met:

  • The tying product must be considered a necessity: The product or service being tied must be something that the customer needs in order to use the product or service being sold.
  • The tying product must be sold separately: The product or service being tied must be sold separately from the product or service being sold.
  • The tying product must have a dominant position: The product or service being tied must have a dominant position in the market or have the potential to gain a dominant position.
  • The tying product must be tied to another product: The product or service being tied must be tied to another product or service in order to be considered a tying arrangement.

Example of a tying arrangement would be also a cable company requiring customers to purchase its television service in order to receive its internet service. This type of arrangement is used by cable companies to limit competition and increase their market share.

Another example of a tying arrangement is a mobile phone company requiring customers to purchase a certain amount of minutes in order to receive the phone. This type of arrangement is used by mobile phone companies to limit competition and to increase their profits.

When to use Tying arrangement

Tying arrangements can be beneficial for both buyers and sellers, as they can provide buyers with discounted prices and sellers with steady sales. However, they can also be used to create a barrier to entry for other companies and reduce consumer choice. As such, it is important for companies to consider the potential benefits and drawbacks of using a tying arrangement.

For buyers, a tying arrangement can be beneficial if it offers a discounted price for a product or service that they need. This can be especially advantageous if the buyer is looking to purchase a certain product or service and the seller is offering a discounted price for purchasing two or more products or services together.

For sellers, a tying arrangement can be beneficial if it provides a steady stream of sales. For example, if a seller is offering a discount on a bundled package of services, they can be sure that customers will be more likely to purchase their services. This can be especially advantageous for companies that are trying to increase their market share.

Types of Tying arrangement

Tying arrangements can take several forms, such as:

  • Exclusive Dealing Arrangements: This is when a supplier requires a customer to purchase all of its products from the supplier, or not purchase any at all.
  • Full-line Forcing: This is when a supplier requires a customer to purchase a full line of products from the supplier, rather than just one or two.
  • Market Division: This is when a supplier requires a customer to purchase a product exclusively from the supplier, preventing the customer from purchasing the product from another supplier.
  • Price Discrimination: This is when a supplier charges different prices for different customers for the same product.

Advantages of Tying arrangement

Advantages of tying arrangements include the following:

  • Increased profits: Tying arrangements can increase profits for the seller by reducing the cost of production and increasing the price of the product or service.
  • Reduced competition: Tying arrangements can reduce competition by creating a barrier to entry for other companies.
  • Increased market share: Tying arrangements can help companies increase their market share by limiting the choices available to consumers.

Limitations of Tying arrangement

Tying arrangements have a number of limitations. Firstly, they can be seen as anti-competitive, as they limit consumer choice and create barriers to entry for other companies. Secondly, they can be difficult to enforce, as customers may not be aware that they are being tied into a contract. Thirdly, they can be difficult to monitor, as the supplier cannot always be sure that the customer is not purchasing the tied product from another source. Finally, they may be seen as unfair by customers, as they are forced to purchase a product in order to access the desired product.

Other approaches related to Tying arrangement

In addition to tying arrangements, there are other approaches that companies can use to limit consumer choice and limit competition. These include price fixing, market division, and exclusive dealing.

  • Price fixing: Price fixing is an agreement between two or more companies to set the prices for a product or service at a certain level. This reduces competition and allows the companies to increase their profits.
  • Market division: Market division is an agreement between two or more companies to divide up a market and limit competition. This can be done by agreeing not to sell in certain geographical areas or to certain customers.
  • Exclusive dealing: Exclusive dealing is an agreement between two or more companies to limit competition by restricting the customers or suppliers they do business with.

In conclusion, in addition to tying arrangements, there are other approaches that companies can use to limit consumer choice and limit competition. These include price fixing, market division, and exclusive dealing. Price fixing is an agreement between two or more companies to set the prices for a product or service at a certain level, market division is an agreement between two or more companies to divide up a market and limit competition, and exclusive dealing is an agreement between two or more companies to limit competition by restricting the customers or suppliers they do business with.


Tying arrangement — recommended articles
Parallel importing — Monopolistic agreement — Price war — Private label products — Captive pricing — Factory price — Multi-channel distribution — Limited distribution — Monopolistic competition

References

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