Publications

In winter 2010, the Toyota Motor Corporation faced a crisis. Following a number of highly publicized accidents involving Toyota vehicles, the company was forced to recall millions of cars with potentially deadly defects. Toyota shut down production at several of its North American plants, halted sales of some of its most popular models, and issued a public apology. Customers fled the showrooms, and Toyota sales in the U.S. dropped 16 percent in January 2010. Additionally, the U.S. government promised to get involved as both the Obama administration and Congress threatened investigations.

Observers were astonished. Toyota had built a reputation for the reliability of its automobiles. Over a period of decades, the company had pioneered lean manufacturing and a stringent quality control system that had become the envy of the world. Building on this success, in the late 1990s, Toyota’s leadership had set a goal of capturing a 15 percent share of the world auto market. From 2000 to 2005, Toyota had steadily expanded its global manufacturing capacity and had also worked to reduce costs by benchmarking to Chinese manufacturers.

The strategy seemed to work. By 2005, Toyota’s market cap was more than the Big Three American car companies combined, and The Economist called it “The Car Company in Front.” By 2007, Toyota achieved its goal of becoming the largest car manufacturer in the world.

However, at the end of the decade, significant problems appeared. In the mid-2000s, the number of recalls on Toyota vehicles increased. The company’s quality rankings slipped, and in 2007 its vehicles were downgraded by Consumer Reports. By 2009, Toyota recalls affected over four million vehicles in the United States alone. In December of 2009, The Economist, the same magazine that had lauded the company just five years earlier, now declared on its cover “Toyota Slips Up.” Other new outlets followed suit. The New York Times published a front page story under the headline “Toyota’s Slow Awakening to a Deadly Problem,” and The Wall Street Journal pronounced, “Toyota Is Unable to Hit the Brakes on Crisis.” During January 2010, broadcast news outlets featured nearly daily updates on Toyota’s woes.

Observers wondered what, if anything, the company could do to restore the quality of its products and its reputation for reliability.

In Illinois Tool Works and Trident v. Independent Ink, the Supreme Court overturned its longstanding per se rule against tied sales by a firm with a patent. Henceforth, market power will have to be demonstrated, whether or not the firm has a patent. Upon such demonstration, a tied sales contract will still be a per se antitrust violation. Our review of the case raises the question of why firms engage in tied sales and what is the antitrust issue. While the courts have focused on the leverage of market power, this case suggests a different concern: with complementary goods (such as a printer and ink), tying is used to engage in price discrimination via metering. The antitrust issue is that consumers will be harmed because the firm, by metering, is able to be a more effective monopolist and thereby extract more of the consumer surplus. And while perfect price discrimination may be efficient, there is no presumption that more imperfect price discrimination improves efficiency. As for the legitimate objectives, such as risk sharing, they can be met via direct metering. This suggests the wisdom of maintaining the per se rule against tied contracts when market power has been demonstrated.