Analyzing a Loyalty-Discount Agreement Under the Antitrust and Competition Laws
Companies like to reward their best customers with discounts. It happens everywhere from the local sandwich shop to markets for medical devices, pharmaceutical products, airline tickets, computers, consumer products, and many other products and services.
Customers like loyalty-discount programs (or rebates) because they get more for less. And the reason so many companies offer them is because they are successful.
Everyone wins, right?
Usually. But the program could very well violate antitrust and competition laws in the United States, the European Commission, or other jurisdictions.
Complicating matters for companies that want to offer these beneficial programs is the fact that the present state of the law in most jurisdictions is, quite frankly, a jumbled mess. It isn’t at all clear whether certain programs will pass muster.
Why would antitrust and competition laws—and their government enforcers—care about companies that offer discounts? Antitrust law, after all, protects competition and, as the Supreme Court pointed out in Pacific Bell Telephone Company v. Linkline Communications (2009), “cutting prices in order to increase business often is the very essence of competition.”
Some courts, commentators, and agencies worry that certain loyalty discounts or rebates will eliminate or maim the price-cutters’ competitors, which ultimately will lead to less competition, as well as higher prices and lower quality.
This can happen in a few different ways, which I will describe in rough form below (as the economic models showing harm to competition are often complex). Please note that I am only discussing discounts for single products or services. Additional complications arise when a company offers discounts for a bundle of products or services.
Importantly, unless the company offering the discount has some form of market power (or is conspiring with a competitor), the discount won’t likely offend antitrust and competition laws. But please consider that market power doesn’t necessary entail that you are a large company, as there are many narrow geographic and product markets.
The form of the loyalty discount is also important to the analysis. The type that are most likely to offend antitrust law are market-share discounts, which are discounts that customers receive when they purchase a certain percentage of their needs from a particular company. These are usually first-dollar discounts (sometimes called retroactive discounts), which means that if the customer purchases, for example, a required seventy-percent of their needs from a company, they receive the discount on all of their purchases, not just the purchases above a certain threshold.
Also, loyalty discounts offered to end-users like customers of a sandwich shop rarely raise competition issues. Antitrust and competition authorities are typically more concerned about wholesale loyalty discounts.
As you have probably figured out by now, the competitive implications of a loyalty discount program are complicated, and go well beyond the basics that I am providing here.
I was recently privileged to be invited by the International Competition Network (ICN)—whose members are government competition enforcers throughout the world—to explore the depths of these issues for its membership by debating the test that antitrust agencies should apply to loyalty discounts.
So if you want more than the basics, you can view the slides from that debate and listen to the webinar here. I also published an article in the journal Competition on the topic a couple years ago, but the law has developed since then, so keep that in mind.
Below are a few different ways to review loyalty discounts. The problem for companies considering loyalty discounts is that it isn’t clear which of these tests courts and agencies will apply. And just as troubling, some of these tests are so dependent upon difficult-to-obtain data or varying assumptions that ex ante accurate predictions are highly unlikely.
You can review the rest of this blog entry at the link below, which discusses in more detail the following methods of analyzing loyalty discounts:
1. The Predatory-Pricing Approach.
2. A Predatory-Pricing Variant Based Upon Contestable Shares.
3. An Exclusive-Dealing Framework.