Final Blaw

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CONSUMER PROTECTION ACT 1986:

The Consumer Protection Act 1986 is a social welfare legislation which was enacted as a result of

widespread consumer protection movement. The main object of the legislature in the enactment of

this act is to provide for the better protection of the interests of the consumer and to makeprovisions for establishment of consumer councils and other authorities for settlement of consumer

disputes and matter therewith connected. In order to promote and protect the rights and interests

of consumers, quasi judicial machinery is sought to be set up at district, state and central levels. The

main object of these bodies is to provide speedy and simple redressal to consumer disputes. The

consumer protection Act, 1986 is one of the benevolent social legislation intended to protect the

large body of consumers from exploitation. Consumers now feel that they are in a position to

declare "Sellers be Aware" whereas previously the consumers were at the receiving end and

generally told "Buyers be Aware"

TIE-UP SALES

A tie up sale (or tying arrangement/ tying agreement/tie-in-sale/clubbed sale) refers to a marketing

arrangement under which the purchaser of a product (tying product), is required, as a condition of

such purchase, to purchase some other product (tied product). Generally, tying products are fast

selling products and tied products are slow moving. Under such an arrangement a purchaser is

forced to buy one or more other products, services, or technology required by him.

Where a manufacturer producing /supplying several products requires the buyers of a particular

product to buy all the products in his product line, the practice is termed as full line forcing.

A dominant firm selling products X and Y makes the purchase of product X conditional to the

purchase of product Y. Product Y can be purchased freely on the market, but product X can only be

purchased together with product Y. Examples of tying include the tied sales of machines and

complementary products, the tied sales of machines and maintenance services, as well as

technological ties that force consumers to buy two or more products from the same supplier due to

compatibility reasons.

EFFECT OF TIE-UP SALES ON CONSUMER BEHAVIOR

In general, tie up sales are against consumer interest. They have their most serious effect on

consumer welfare when they are used as a device to monopolise the tied products market and to

foreclose them to competition. This results in a limited supply and increased price of the tiedproduct. It has been observed that tying arrangements served hardly any purpose beyond the

suppression of competition. Tying of products which are strongly complementary to each other is

most serious. Tying of products that are either weak complement to, or independent of, each other

can also be serious under two circumstances:

1. Where there are relatively significant economies of scale, and

2. Where there is a relatively low elasticity of demand for the product

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Some criteria to determine whether tie up sales adversely affect competition and lead to the

creation of monopoly:

1. Market share and economic power of the firm in the tying product market: If the supplier

has insignificant market share, the tying arrangement may not lead to creation of market

power in the tied goods market. The economic power in the tying product market can be

measured by the uniqueness of the product and its desirability to consumers.

2. Reason for using tying arrangements: If the arrangements are genuinely needed to protect

the goodwill of a company and where such arrangements do not lead to building up of

market power, tying arrangements need not be disallowed.

3. The ease of entry for the tying goods market: If the entry to the tying goods market is easy

for the competitors, the tying arrangements may not have an adverse effect on competition.

For example the tie up sales of computer and punch cards may not adversely affect

competition if manufacturers of punch cards are able to manufacture computers also. If

patents restrict entry of new computer manufacturers, the interest of card manufacturers is

likely to be adversely affected.

RATIONALE BEHIND TIE-UP SALES

1. Economic leverage: Through tie up sales, a supplier exploits his dominant position in the

market for tying product to strengthen his position in the market for the tied product.

2. Evasion of price regulation: Where the maximum selling price of one of his products has

been fixed under state regulation, the supplier may find it profitable to tie the sale of such

products with one or more of his products. For example, unfurnished apartments in a rent-

controlled market (see my price ceiling article) are not allowed to have rent above some set

amount, whereas furnished apartments can charge higher rents. This leads to tying in: An

apartment with a dumpy recliner is a furnished apartment.

3. Price discrimination: Tying in sales allows the firm to effectively charge different prices to

different consumers based on willingness to pay. For example, the IBM case, where IBM

(then a supplier of tabulating machines) tied the sale of its IBM punch cards to the purchase

of their IBM tabulation machines. By so tying the sales and marking up the punch cards, IBM

could effectively charge a higher price to intensive users of the machines.

4. Strategic Tying: Tying sales can be a successful anti-competitive strategy. For example,

Microsoft's used tie-in sales to foreclose small companies (like Netscape) from building a

viable competing suite of applications to Microsoft's application software suite. Microsoft

tied Internet Explorer and other applications to the sale of its operating systems.

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CASE 3

Godrej and Boyce Manufacturing Co. Ltd., manufacturer of steel furniture, refrigerators, typewriters

and locks, required its wholesalers dealers to keep and maintain proper stocks of all its products and

of minimum value Rs. one lakh, and further reserved the right to enhance the minimum value of

keeping and maintaining the stock. The MRTP commission passed cease and desist orders against

this naming it as a case related to tie up/ full line forcing.

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