The John M. Olin Center

Paper Abstract

822. Einer Elhauge & Barry J. Nalebuff, The Welfare Effects of Metering Ties, 09/2016; forthcoming in Journal of Law, Economics & Organization, Vol. 33 (2017).

Abstract: Critics of current tying doctrine argue that metering ties can increase consumer welfare and total welfare without increasing output and that they generally increase both welfare measures. Contrary to those claims, we prove that metering ties always lower consumer welfare and total welfare unless they increase capital good output. We further show that under market conditions we argue are realistic (which include a lognormal distribution of usage rates that are independently distributed from per-usage valuations), metering ties always harm consumer welfare, even when output increases. Under those market conditions, we show that whether metering ties raise or lower total welfare depends on the dispersion of desired usage, the cost structure, and the dissipation of profits caused by metering. For realistic cost values, metering ties will reduce total welfare if the dispersion in desired usage of the metered good is below 0.62. (For comparison, 0.74 is the dispersion of income in the U.S.) If 5% of metering profits are dissipated, metering will reduce total welfare for all cost levels unless the dispersion in desired usage exceeds 150% of the dispersion of income in the U.S.

822 revision