Fidelity Rebates - Alison Jones - King's College London –June 2016 OECD discussion

OECD Roundtable on Fidelity Rebates

16 June 2016

Session 1: Terminology

Alison Jones, King's College London

Potentially problematic ‘low’ pricing practices

Predatory Pricing

Selective Price Cuts

Margin/ Price Squeeze

* Rebates

Price Discrimination


Terminology

Rebates:

• THRESHOLDS

• Exclusivity / fidelity/ loyalty* – rebates conditional on purchasing exclusively (or nearly) from the seller (incentivise but do not contractually require exclusive purchasing/ dealing) or on a set % of purchases made from seller (share of need rebates/ market share/ share-based discounts) (referencing rivals);

• Quantity/volume – linked to volume of purchases (without reference to total purchases). Reward large buyers, can be cost related;

• Growth – when discounts depend on growing buyers’ purchases

• Standardised – when targets, available to all customers, are met;

• Individualised – when targets, set for individual customers, are met;

• UNITS OF DISCOUNT

• Retroactive/rolled-back/all unit rebates – applied to all units purchased when a specified target is met;

• Incremental – applied to additional units once target met;

• NUMBER OF PRODUCTS

• Single product*

• Bundled/aggregated discounts – discounts given on aggregated purchases of products belonging to different product markets

* Focus for today’s sessionsAlison Jones, King's College London

Can have loyalty-inducing or suction effect (de facto share of need rebates)*

EU Terminology: GC in Intel divided rebates into three categories for antitrust analysis

1. Quantity Discount Systems

Simple standardised quantitative rebates based purely on (non-discriminatory) volume of purchases

2. Loyalty or ‘Exclusivity’ Rebates

Conditional on purchasing all/ most of requirements from dominant firm (distinct from predation/ margin squeeze)

3. Other (Target) Rebates

No exclusivity condition as such but rebates may have a loyalty-inducing or suction effect, especially if individualised/ retroactive


OECD Roundtable on Fidelity Rebates

16 June 2016

Session 2: Legal framework


Identifying exclusionary rebates: Issues

Goals

• Rules that enhance consumer (and/or social?) welfare vs other (outcome or process objective? unfairness? protecting SMEs)?

Achieving the objective

• If aim to promote predictability, fairness, and transparency – need tests empirically grounded in economic efficiency while at the same time administrable by agencies/ courts (jury) (Ohlhausen)?

• Context: integrated agency model; judicial model; treble damages; jury trial etc

• Risk of Type 1 or Type 2 errors?

• US acute concern about false positives partly because of high levels of private litigation (Trinko/linkLine) - fearful of condemning low prices and deterring firms (even dominant ones) from competing (Brooke Group) – reducing ‘unmeritorious’ litigation

• But if bar too high/ rules not administrable - can shut out injured parties, undermine credibility of law

• EU less faith in market and special responsibility of dominant firms


Sup Ct in Trinko sought to avoid ‘[c]onstructions of §2 that might chill competition, rather than foster it …’. ‘[T]he cost of false positives counsels against an undue expansion of section 2 liability’

Identifying exclusionary rebates: Issues and trade offs

Are presumptions of legality or illegality justifiable?

• What does ‘economics’ tell us? Can a presumption be empirically grounded in economic efficiency? If can encourage efficient investment etc; and/or reduce downstream competition etc – good or bad outcome for consumers – is it/when is it justifiable to apply presumptions?

Constructing more complex standards

• Consistency with treatment of other single-firm conduct (predation – margin squeeze – exclusive dealing)? RRC rather than predatory paradigm?

• Consistency with treatment of agreements (e.g., Article 101/section 1)?

• Should a unifying principle underpin all tests – e.g., the as efficient competitor (‘AEC’) test?

• Need for safe-harbours for ‘dominant’ firms?


Given the enormous stake that antitrust has in low prices, and our extraordinary difficulties assessing … claims, the best course is to develop … rules that are both simple and somewhat underdeterrent, …. Note that an underdeterent rule may be the best option even if we all agree that there are some instances of predatory behaviour that our definition does not capture. (Hovenkamp)

Different approaches (EU and US)Presumptively legal - unless below cost on all units sold e.g., no rule against rebates if do not infringe ordinary predatory pricing rule?

A price-cost rule (involving attribution of discount to contestable/ competitive part of market)? Feasibility of recoupment/ other evidence of anticompetitive effects?

Fact-driven rule of reason (consumer welfare standard?) –linked to theory of harm. E.g., analysis as form of de facto exclusive dealing? Relevance of intent? How structured?

Presumptively illegal – unless firm can provide objective/efficiency justification (rebuttable presumption) – shift the burden to the firm to justify

EU: approach relatively settled in Courts but heavily contestedUS: no Supreme Court opinion, splits in circuits – area where plaintiffs are still winning cases (at least if defendant very high market shares)

Rebates: legal unless predatory?View: rare that anticompetitive so price cuts should not be illegal unless violate the predatory pricing rules (comparing average price (after discounts) to the cost of all units sold to customer). Under-inclusive rule preferable:

• Barry Wright v Grinnell (First Cir, Judge Breyer): Unlike economics law is an administrative system the effects of which depend upon the content of rules and precedents only as they are applied by judge and juries in courts and by lawyers advising their clients. Rules that seek to embody every economic complexity may well, through the vagaries of administration, prove counterproductive, undercutting the very economic ends they seek to serve ... We must be concerned lest a rule ... that authorizes a search for a particular type of undesirable pricing behavior end up by discouraging legitimate price competition

But little support – as too under-inclusive? Shut out injured parties?

• EU only simple standardised quantitative rebates based purely on (non-discriminatory) volume of purchases presumptively legal (presumed to reflect cost efficiencies). But narrow category (see below)

But another view is that discount attribution test appropriate mechanism for determining whether or not rival foreclosed from market and/or for providing safe-harbour if do not fail


Price-cost ruleUS:

• AMC (bundled rebates): discount attribution cost test + recoupment + adverse effect on competition – AND Peace Health (bundled rebates), but notably no recoupment or effect on competition requirement

• No court applied in single product loyalty discount case (bundling contestable and non-contestable volume)

EU:

• Commission’s Guidance Paper – intervene only if anticompetitive foreclosure of as efficient competitors:

• What price would rival have to offer in order to compensate the customer for the loss of the conditional rebate if the latter would switch part of its demand away from the dominant firm? Calculate effective price of contestable portion and consider if below cost (AAC – LRAIC) and efficiencies.

• But Intel – no need to use AEC test; Tomra –below cost pricing not a pre-requisite; Post Danmark II – no requirement to apply AEC test in rebates case – especially in market where emergence of as efficient competitor very unlikely

Price-cost test

But is data available, is such a test workable (especially ex ante)?

Cut against predictability, transparency? Not the ‘panaceas of administrability’ we thought (Ohlhausen).

Risk of false negatives – should not provide safe harbour as rebates cheaper way of excluding rivals and fewer consumer benefits (Salop). Don’t need to price below cost for it to be successful and to deprive rivals of substantial sales/ increase their costs

Under inclusive, because competition can benefit from less efficient competitors?

Preferable to focus on evidence of harm to competition? More akin to exclusivity –claims do not fundamentally relate to pricing practices?


More fact-specific rule of reason analysis

Four prong test similar to that applied under section 1 (Microsoft); claimant to establish anticompetitive effects e.g., raising rivals’ costs/ reducing their output

May be problematic if amounts to de facto exclusive dealing resulting in substantial foreclosure (Meritor/ Concord Boat)

US agencies ‘perform a detailed evaluation of the practice’s actual or likely anticompetitive effects’

But enough objective economic evidence without some price-cost analysis?

BUT in EU fundamentally different approach to exclusive dealing depending upon whether supplier is dominant (contrast Verticals BER/ Delimitis with Hoffman-la Roche)


Presumption of illegality: affirmed by GC in Intel

Exclusivity rebates by their very nature capable of foreclosing competitors - incentivise customers not to purchase from competitors making access more difficult

D to large extent unavoidable trading partner which enables it to use economic power on non-contestable share of demand as leverage to secure contestable share

Different treatment to predation/ margin squeeze cases - about exclusivity not pricing. No need to use AEC test (demonstrates only if impossible for AEC to compete not if more difficult)

No need for evidence of actual/potential foreclosure effects. Amount of rebate, duration of contracts, portion of market affected irrelevant

But reasonable to exclude all analysis of anti-competitive effect? (Commission does some in practice – Intel/GP?)

Is it possible to rebut the presumption in practice (no case in Europe?)?

Is it consistent – with treatment of other rebates, margin squeeze, article 101 analysis

Against trends of ‘effects’ analysis?

High risk of error costs for firms that might be fearful of dominance at 40% market share

EU: summary

1. Quantity Discount Systems

•Simple standardised quantitative rebates based purely on (non-discriminatory) volume of purchases - Presumptively legal (presumed to reflect cost efficiencies)

•But narrow category - only if fixed objectively and applicable to all possible purchasers

•Not if loyalty inducing (Michelin)

•Not standardised retroactive rebates on orders over a given period (Post Danmark II)

2. Loyalty or ‘Exclusivity’ Rebates

•Conditional on purchasing all/ most of requirements from dominant firm

•Abusive by object (Hoffmann-La Roche/ Intel) – presumed to be abusive unless objective justification?

3. Other (Target) Rebates

•May have a loyalty-inducing or suction effect, especially if individualised/ retroactive

•Must consider all the circumstances to consider if rebates can produce exclusionary effect (capable of making entry difficult/ impossible or impossible for the other party to choose other sources of supply) and no objective justification

•No requirement to apply an AEC test


Presentations & Public Speaking

Fidelity Rebates - Alison Jones - King's College London –June 2016 OECD discussion