Tie-ins and exploitation
A JULY 24, 2008 decision by the Competition Commission of Pakistan (CCP) looked at the question of whether the “mandatory sale of laptop computers to incoming students by Bahria University constitutes tie-in amounting to abuse of dominant position under Section 3 of Competition Ordinance, 2007”. It was held that it did. Bahria was not fined but asked to desist from the practice immediately.
This should be an important precedent for Pakistani markets, but it has not had any repercussions. There are schools that require students to buy textbooks or uniforms from the school or designated providers. Many doctors or hospitals recommend and sometimes require people to get tests done from specific laboratories or to buy medicines from specific pharmacies. Even in consumer products we come across interesting tie-ins. A lot of lawn manufacturers/ retailers sell shalwar-kameez and dupatta sets together, for example. The last is a case of bundling, but it is not too different from a tie-in, especially since there is no technical reason for forming the bundle.
Tie-ins are beneficial for a seller as they allow her relative monopolistic power in one market to create the same power in another where she did not have that power to the same degree. It appeared that Bahria had monopolistic power over students once students decided to join the university. It did not have monopolistic power in the sale of laptops, but the monopoly in education allowed it to create such power in the computer market. Technically, this is a tie-in, as are the ones where schools ask students to buy supplies from them. The question, though, of whether to allow a tie-in or not is not settled by the existence of the tie-in alone. We have to see whether the tie-in is welfare-enhancing.
Bahria University, in its defence, did argue that it was not making money from computers and the reason for it importing/selling computers on a mandatory basis was that having individual computers enhanced students’ learning levels and made for a better university experience. If there was someone making money, it was the bank that had financed the scheme and Bahria was not a party to those returns.
The CCP member did not challenge this contention in his analysis. In fact, he also seemed to allow that having a computer might indeed enhance learning levels for university students. So, while Bahria could make it mandatory to have a computer, it should not have tried to sell these computers and imposed them on the students.
In some cases a tie-in makes sense. Yale University requires all of its incoming and second-year students to live in on-campus housing. Some students challenged this requirement a few years ago arguing that living in co-educational dorms and without proper dietary arrangements violated their religious sensibilities and federal housing laws.
Yale argued that living with others in on-campus housing was an integral part of the college experience and education. The court went with Yale saying that the college experience argument had weight and since there were quite a few other schools of equally good quality, students who did not like the Yale experience and package could go elsewhere. The tie-in was allowed.
But this raises an interesting question. Suppose Bahria had gotten a deal from a computer manufacturer saying ‘If you give us an order for ‘X’ number of computers, we will give them to you on 50 per cent discount. But the order has to be for ‘X’ number of computers’. The situation would be: all students could have computers at half-price but if even one student out of the stipulated number refused to buy a computer through the deal, all students would have to buy them individually at full price.
Could the computers have been mandatory under that condition? The issue would have been the freedom of individuals to choose the computer vendor against the opportunity to get them at half-price. Assuming a spread of wealth across the student body, the issue of choice versus lower price would have different desirability levels for students. For the wealthier students choice might be more important: buying an Apple or some other machine and being able to stand out. For the poorer students having a cheaper machine might be more important. How would CAP have decided that case?
Even without the discount story, Bahria might have had a case if it had argued that having the same make and model of computer allowed cheaper provision of after-sales service, and cheaper acquisition of software. But these matters were not raised, so Bahria’s case was not strong.
Bahria did ensure that students who could not pay for the computer through one-time payment could buy computers on instalment. But since the interest rate was too high, the commission member saw that as a negative. Bahria could have argued that giving all students access to computers, albeit through expensive financing, would be positive. What if the university had offered low-interest or interest-free loans for deserving students? Would the benefits of the tie-in have outweighed the cost of choice reduction?
The area of competition regulation has to be case-based. In general, microeconomic issues, particularly issues of competition, tend to be very dependent on the specific context of the market, the conditions of the individual players and the welfare assessment of the stakeholders.
In the case of Bahria, though the analysis is a bit narrow, it does seem that the commission did come to the right decision. If the university had benefits in mind, it definitely did not make a strong case for them. And it would seem that the precedent would apply to a lot of schools that tie in supplies with education. It seems these players will not desist unless someone complains to the commission or the latter takes notice on its own. But in some other cases, such as getting quality laboratory tests done, there might be good reasons for tie-ins. Only detailed work, case by case, through a very vigilant competition commission can differentiate between the cases.
The writer is senior adviser, Pakistan, at Open Society Foundations, associate professor of economics, LUMS, and a visiting fellow at IDEAS, Lahore.