Tying markets

A friend went to buy some shalwar-kameez suits. She came back quite frustrated. For many of the prints she liked, the sellers insisted on selling 'three piece' suits to her. They wanted her to have x yards for a shirt, y for a shalwar and z for a dupatta. In most cases she liked the shirt prints, did not like the shalwar prints/colours and did not feel she needed the dupatta that the sellers were selling in the three-piece suits. The sellers refused to sell her just the shirts she liked. And she was miffed at that.
This is a simple example of tying products. In this case all the products are from the same market, but clearly they could be from distinct product/service markets too. In some cases tying or bundling makes tremendous sense. For example, shoe sellers tie right and left shoes in a pair. And buying a pair of shoes makes sense for most people. Though, of course, there is no problem if there was a person who wanted the left and right shoe to be of different types. But most of us, so far, are sticking with the same type of left and right shoes and hence tying shoes in pairs makes sense. But if we had a sizable population of people with three feet, bundling in pairs would make less sense.
One can be sure that tying of goods or products only happens when it is in the interest of the seller to do so. That is, when it gives her more profit. For obviously, if there is no profit in it, the seller would sell the goods/services separately. In some cases, the tying is convenient from the buyers' point of view too, as in the shoes example given above, but this need not be the case all the time. In fact, the more interesting cases are when a seller tries to bundle products of different elasticities to take advantage of the inelasticity of the product with the least elastic demand.
In the case of the three-piece suits, clearly the demand for the kameez is going to be the least elastic. It is the main item people come to buy, it is what people match other things to. The shalwar can even be white or black or of other matching colours. While the dupatta has the most elastic demand as there are many women who do not wear a dupatta, or prefer a shawl or chaddar, or have a white or plain dupatta. So dupattas have the most elastic demand. The seller, in making this a three-piece suit, is trying to use the inelastic demand of the kameez to be able to sell one shalwar and one dupatta with it. He knows if he does not tie them up, people will not buy a shalwar and a dupatta with every kameez. But this must lower the overall demand of kameez too. Definitely, since the three-piece is more expensive, it will lower overall demand for kameez's too. But, it must still be the case that sellers make more money this way then if they did separate selling. Or they would not be doing it.
But the question of whether it is in buyer's interest or not is still open. Clearly there are many people who do not like the three-piece bundle. Why should the seller be able to dictate the bundle? There is no technological necessity that the seller has to make three piece suits only. She can easily separate out the three pieces. So, should buyers be allowed to get away with it or is there a role for a regulator to step into this space. In most jurisdictions tying and bundling are looked at very suspiciously by lawmakers and law enforcers. In fact in most cases it is considered to be illegal, and in others the seller is almost required to show an overwhelming reason/benefit for the practice to be allowed.
In Pakistan too the Competition Act clearly states that 'dominant position' can be used to abuse customers. And under that clause of the Act it clearly identifies 'tie-ins' as one of the examples of abuse of dominant position where purchase of one good is made conditional on the purchase of another good. The Competition Commission of Pakistan (CCP) should look at the issue of three-piece suits also.
But it seems tie-ins are not that uncommon in Pakistan. Some friends tell me that a number of private schools force children to buy uniforms, books and other services from them too. Clearly this is an abuse of 'dominant position'. In fact, there is even a precedent, in the area, from the Competition Commission. They had, if memory serves me right, moved against Bahria University, when the University had forced its students to buy computers from them. The private schools should not be tying markets as well and even if they offer books, uniforms and other services on campus, they should allow students to buy from outside retailers as well. The option should lie with the student and there should be no element of 'force' that constitutes an abuse of the 'dominant position' of the school with reference to a student who is already enrolled with them.
There are plenty of examples of tying and bundling in Pakistan. Most of them tend to be illegal or at least very questionable from the perspective of the consumers. But, given the lack of development of competition law, practice and implementation of law in Pakistan, most sellers get away with the abuse. But these practices are anti-competition and anti-markets and do constitute 'unfair' practices. It would be nice if the Competition Commission of Pakistan, thinking beyond just the few industries they have been focusing on, takes up some of these issues too. If the CCP did take on some of these issues proactively and imposed sizable fines on those who are flouting the law, one can be sure that these precedents would have a significant effect as deterrent too. In fact, if the CCP even studies such issues and produces some broad pronouncements against such practices, it should start having some deterrent value. But if these practices are not checked, consumers and competition will continue to suffer.
(Faisal Bari, on leave from the economics department at LUMS, is currently working with an international NGO. His work is focused on economic/social development, especially with reference to education. He can be reached at [email protected])