Christmas bargains, bundling, and competition
by Atty. Amabelle C. Asuncion
December 5, 2018
The cold early-morning breeze, dancing streetlights and nostalgic Jose Mari Chan tunes cannot but signify that the Yuletide season is here. It is the time of year when godparents suffer temporarily from selective amnesia. The only antidote to this holiday disease is finding gifts that are millennially hip but cheap. Thankfully, this is within reach.
Godparents no longer must choose between breaking the bank in the mall and penny-pinching in Divisoria. Ninongs and ninangs can scour a wide selection of products to discover the best deals. Creative promotions abound—buy one-take one, buy one-get a selected second item at a discount, bundled items at a discount, package deals, etc. To the frugal, these bargains are heaven-sent. But a word of caution is in order.
Some of these deals are forms of tying and bundling, which the Philippine Competition Act considers as abusive conduct if practiced by a dominant player without efficiency justifications that benefit consumers.
Tying occurs when the sale of goods (the tying product) is conditional upon the purchase of a different (tied) product, or upon the buyer agreeing not to purchase the tied product from another seller. Tying, which can involve products, services, franchises, intellectual property or combinations of these, may be contractual or technical.
Contractual tying is more common and imposes the tie as a condition on the buyer. If a generous ninong wants to gift his favorite godchild with a car and is told by the dealer that the purchase is contingent on taking out a specific car insurance, then there is contractual tying between two distinct products. Maybe the ninong is only willing to spend on the car, leaving the purchase of insurance coverage to his inaanak. But with tying, he cannot buy the car without also taking out the recommended insurance.
Technical or technological tying occurs when the tied product is physically integrated into the tying product such that it is impossible to purchase the latter without the former. For example, selling a printer that uses only cartridges produced by the same manufacturer. The buyer is forced to purchase cartridges of the same brand even if there are cheaper alternatives. Before buying your inaanak a popular battery-operated toy for half the price of other brands, check first if the toy requires expensive batteries that can only be purchased from the same manufacturer.
Closely related to tying is bundling, wherein a package of two or more products is offered at a discount. Consumers are fond of bundles because of the convenience and the apparent savings they offer. The noche buena basket is the classic example during the Christmas season.
For the most part, consumers benefit from bundles, of which there are two types: pure and mixed. Pure bundling is when two products can only be bought together and are unavailable for purchase separately. An example is the OTT (over the top) delivery of film and TV content via the Internet, where a subscription comes with preselected content that cannot be unbundled and bought individually.
Mixed bundling is when two products are available for sale separately but are sold at a discount when bought together. Value meals and gift sets are examples. Another example is the “buy one, get a second item at a discount” deal. Mixed bundling is often favored because it offers options while still allowing buyers to purchase the products separately.
Tying and bundling are common commercial practices that may redound to the benefit of consumers. The economic logic is that tying and bundling reduce costs and allow economies of scale and scope for producers, which lead to higher sales, and lower prices. But these can raise competition concerns because of potential foreclosure of competitors and extraction of consumer surplus.
A tie has the effect of foreclosure if it restricts the opportunities available to competitors, frequently in the tied product. The tie is used as leverage by an entity dominant in one product market to foreclose sales in a second product market. In the battery-operated toy example above, the manufacturer tries to leverage its market power in the production of the popular toy against competitors in the market for batteries. Due to the tie, competition in the second market could be foreclosed, to the detriment of consumers.
A tie is also harmful if it amounts to extraction; that is, consumers are forced to purchase both products and therefore pay more. The consumer could have saved money were it not for the tying because they are interested in buying only the tying product.
When the tying and bundling have such foreclosure and extraction effects, the practice will be considered anticompetitive unless the dominant entity engaged in it presents objective and efficiency justifications. These justifications include improvement of production and distribution, technical and economic progress, and consumer benefit.
To a consumer, the disadvantages of tying and bundling may be unclear. The thrifty godparents may be too happy to find any promo that looks like a good bargain. Consider, however, this scenario: after years of living together, you propose to marry your significant other, and then are told that the proposal will be accepted only if you agree to have your future mother-in-law move in with you; or your proposal is accepted and, on your wedding day, you find out that your mother-in-law will live with you thereafter. Since you really want to marry your significant other, you end up accepting the arrangement. This is a case of tying between your significant other and your mother-in-law, or more specifically, your marriage and the living arrangements of your mother-in-law.
Compare this with another scenario: You ask for your beloved’s hand in marriage, and your future in-laws agree for as long as you live in the new condominium unit that they bought. In this case, your marriage is tied to living in the new condominium unit. Which of the two ties would you consider a good deal?
Surely, promos that involve tying and bundling can be aguinaldo for your conscientiousness and generosity. But while some of these deals may feel like winning a grand raffle, others sound like a prenuptial agreement. It is quite a treat if it feels like the first; but if it feels like the second, it is no Christmas bargain.
Before her appointment to the Philippine Competition Commission, Commissioner Amabelle C. Asuncion was engaged in corporate and commercial practice and served as chief legal counsel of a top company and a corporate partner of a law firm. She was also previously involved in legislative, law and policy reform, advocacy and adjudication work. Commissioner Asuncion has a master of laws degree (with distinction) in International Legal Studies from Georgetown University Law Center in Washington, D.C., and is admitted to the New York bar.
(Originally published on Business Mirror’s Competition Matters column on December 5, 2018 here.)