Bundling and high tech industries

From one generation to the next, innovation is undoubtedly a central determinant of the welfare of humankind. Economists studying individual projects, moreover, routinely find that the benefits of innovation to society as a whole greatly exceed the benefits to the firms that develop the innovation. Innovation stands at the heart of economic growth, and the high technology industries have been the source of the greatest economic innovations in recent decades. Nevertheless, antitrust has not always been good to industries involved in high technology. This inhospitality may be due to the persistence of antitrust rules and the slow pace of judicial change, on the one hand, and the rapidity of changing technology on the other. Bundling is peculiarly related to these potential incompatibilities because high technology products change quickly and are constantly in the process of being redesigned, and that redesign often takes the form of combining formerly separate products or at least of adding new dimensions or functionalities to an existing product. This combination or addition of features not infrequently runs up against antitrust rules directed against tying. We will use the term “bundling” and tying interchangeably as is sometimes done in case-law. The design of high technology products is in a state of flux, but the antitrust rules governing tying were formulated during the industrial age and were based upon now outmoded understandings of economics. Because tying restrictions, like all legal rules, change slowly, they could be expected to pose continuing challenges to high technology industries. PRODUCT DESIGN Changes in high tech industries often involve swift alteration of product design. This was the case in the 1970s when IBM was leading the development of main-frame computers, and it was the case in the 1990s when Microsoft was developing its operating system and associated browser. In these examples a conflict (or potential conflict) arose when antitrust rules over tying arrangements were applied to the producer's product designs. In Europe the same conflict is currently generated by the European Commission's approach to tying in the media player element of the European Microsoft case and in its use of the essential facilities doctrine to deprive that company of the fruits of its integration activity in the server software part of the same case. In these cases, the problem arose when the producer integrated formerly stand-alone items into its principal product. In IBM's case, the principal products were main-frame computers.