Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

Tie-In Sales and Banks

Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

Tie-In Sales and Banks

Article excerpt

A bank is a multiproduct firm. While its products can be grouped into two broad categories, credit and deposit services, each of these categories comprises many distinct products. In addition to these "traditional banking services,"1 some banks, either directly or through affiliated companies, offer a wider array of financial services. A continuing trend toward deregulation is likely to further expand the set of activities and markets open to banking organizations.

Some of the services offered by banks are sold to distinct sets of buyers. On the other hand, there are broad classes of bank clientele who regularly obtain multiple services. A business firm's relationship with a bank, for instance, may include deposit and cash management services as well as regular extensions of credit. The typical household is also a user of multiple bank services.

It is not uncommon for a multiproduct firm to undertake joint marketing efforts. The costs incurred to generate sales for the various products sold cannot always be neatly allocated across products. Such joint actions might occur in all aspects of marketing. A seller might, for instance, seek to develop a single brand identity for a variety of products so that expenditures on promotion of the brand might enhance the sales of all the products. Joint efforts might also show up in the pricing of products. For instance, a seller might give discounts on one product that are contingent on the buyer's purchase of some other product from the same seller. Or a seller might choose to sell two products only as a bundle, not separately. It is this sort of tying, or bundling of products, that has attracted a fair amount of attention in discussions of the law and economics of antitrust.

If tying is to raise concerns from an antitrust point of view, it must be that the firm engaged in the practice has some amount of market power. This article examines tying as a use of market power, with the goal of understanding and evaluating restrictions that banks face with regard to such pricing behavior. After reviewing those restrictions and comparing them to the broader antitrust treatment of tying, the article focuses on a particular motivation for tied sales; this pricing strategy can facilitate price discrimination among diverse buyers. This focus suggests that the welfare implications of tying can be ambiguous and that public policy and antitrust law should approach the practice on a caseby-case basis.


In antitrust legislation and case history, the tied sale of multiple products has been attacked as an attempt by a seller with a monopoly position in one market to extend its power into a second market.2 Specifically, section 3 of the Clayton Antitrust Act makes it unlawful for a seller to make a sale on the condition that the buyer refrain from dealing with the seller's competitors. This section has been interpreted as a prohibition on tying contracts. For instance, in 1936 the Supreme Court found that IBM violated the Clayton Act by requiring that lessees of its punch-card tabulating machines purchase only punch cards supplied by IBM.

The legal treatment of allegedly anticompetitive practices typically takes one of two forms. A particular practice might be treated as per se illegal. In such a case, violation of the law is established simply by a demonstration that the practice in question took place. It is also possible for the legality of a practice to depend on the particular circumstances in the case at hand. In such instances, a "rule of reason" is said to apply. The Court's language in the 1936 IBM decision strongly suggested that the Clayton Act intended for tying to be treated as per se illegal.

The uncertainty in the treatment of tying, as in many antitrust issues, revolves around the interpretation of statutes stating that a given practice is illegal if its use may "tend to lessen competition or create a monopoly. …

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