Principles of Microeconomics / Unit 10 MIC 0907 worked example, 60 to 90 seconds
Classifying a Practice
The idea
Given a described practice, name it and say when it is likely lawful. A seller that deals only through its own outlets is exclusive dealing, lawful when it sharpens dealer competition and suspect when one retailer locks up many makers. Conditioning one product on buying another is tying, suspect when it forces unwanted purchases. A package at a better price with separate purchase available is bundling, usually lawful. Pricing below average variable cost to drive out an entrant is predatory pricing, illegal but hard to prove.
In practice
Worked example, four cases. A car maker sells only to its franchised dealers: exclusive dealing, lawful, since the dealers compete with one another. A software firm sells its operating system only with its own browser: tying, contested, since buyers wanting another browser are forced. A cable company sells television, internet and phone together at a discount and separately at full price: bundling, lawful. An airline cuts fares on one route below the cost of flying it until the newcomer leaves, then restores them: predatory pricing, illegal if the below-cost pricing and the intent can be shown.
Where people slip
The same practice can be lawful in one setting and not another; the law evolves case by case. And a price cut that hurts a rival is not predatory unless it is below the cutter's own variable cost.
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