applEcon

Applied Economic Consultants

Case Studies section image

Case Studies

Collins Inkjet Corporation v. Eastman Kodak Company

Antitrust, tying, bundled pricing
U.S. District Court for the Southern District of Ohio Western Division

Consultation with applEcon economists helped Collins Inkjet to demonstrate that their claim met a precedent-setting new standard for tying, and sustain the defendant’s appeal of a preliminary injunction in Collins Inkjet Co. v. Eastman Kodak. The plaintiff, Collins Inkjet claimed that Kodak tied its printer ink to Kodak printhead refurbishment in violation of Section 1 of the Sherman Act. Collins’s expert economist, Professor John Bowblis, demonstrated to the satisfaction of the Court that Collins was likely to succeed on the merits, and the court issued a preliminary injunction barring the challenged pricing policy. Kodak appealed the injunction, challenging the legal standard applied by the district court. Collins Inkjet called upon applEcon to consult regarding issues related to implicit tying.

A “tie” is an agreement to sell one product on the condition that the buyer also purchase a different  product. Courts have held that tying is illegal under Section 1 of the Sherman act when four conditions are satisfied: the tying and tied goods are separate products, a tie exists, the defendant has sufficient power in the market for the tying good that the tie forces consumers to buy the tied good, and the tie affects a not insubstantial amount of commerce.

Since Virtual Maintenance v Prime Computer, over twenty years ago,courts have recognized that a tie can be imposed by policies which induce rational buyers to purchase the tied good when they buy the tying good. To illustrate such “implicit tying”, setting a price of zero for the tied good conditional on purchase of the tying good “forces” all rational buyers to acquire the tied good from the defendant when they buy the tying good. Collins Inkjet alleged that Kodak’s prices induced rational purchasers to buy ink from Kodak. Relying on the 6th Circuit Court’s decision in Virtual, the district court found that Collins was likely to succeed on the merits, and enjoined Kodak from charging the challenged prices. Kodak appealed the injunction to the 6th Circuit. The 6th Circuit established a new standard for implicit tying: “a tie enforced solely through differential pricing… is not unlawful unless the differential pricing is the economic equivalent of selling the tied product below the defendant’s cost.” “This analysis is the same as the Ninth Circuit’s analysis of bundled discounts, an analogous pricing policy governed by § 2 rather than § 1 of the Sherman Act”, often called the “discount attribution test”.

applEcon’s roots run deep in the topic of anticompetitive tying and bundling. One of applEcon’s founders, Jeffrey MacKie-Mason, was the expert economist in Virtual v. Prime, and also in the precedent-setting tying case Eastman Kodak v. Image Technical Services; two of applEcon’s current senior economists provided extensive support on that case as well. More recently, applEcon demonstrated an implicit tie to the satisfaction of a jury in Valassis v. News America. So when Kodak appealed Collins’s preliminary injunction to the 6th Circuit, Collins Inkjet retained applEcon.

The 6th Circuit’s new standard would have presented Collins Inkjet with a problem, as the Court noted in its opinion, “[t]he record makes it difficult to determine conclusively Kodak’s ink production costs”. How, then, could Collins satisfy a standard that calls for a comparison of price to cost? In its review of the evidence, applEcon found that, according to Kodak’s own analysis, Kodak would make greater profit if customers (irrationally) refused Kodak’s implicit tie than it would if customers made the rational decision to accept Kodak’s ink under the implicit tie. applEcon recognized that this evidence, when coupled with a little algebra, demonstrated, as the 6th Circuit found, that “as a matter of formal logic, [footnote omitted] that Kodak's pricing is coercive under the discount attribution standard”. The omitted footnote replicates applEcon’s algebra.

Read the Court’s opinion here.