July 12, 2014

Bundled & Loyalty Discounts Under the Microscope at DOJ/FTC Workshop

Seller Beware: Consumer Protection Insights for Industry,

On June 24, leading antitrust economists and attorneys participated in a workshop held by the Federal Trade Commission (FTC) and Department of Justice (DOJ) Antitrust Division on conditional pricing practices, including loyalty and bundled discounts. The agencies' objective for the workshop was to advance the economic understanding of the potential harms and benefits of these types of discounts, and to reexamine their treatment under the antitrust laws.

Antitrust plaintiffs sometimes claim that discounting by dominant sellers (i.e., sellers with market power), facilitates anticompetitive exclusion. In such cases, it is alleged that a dominant seller uses discounts to drive one or more of its competitors out of the market. For instance, a dominant seller might use a loyalty discount to buyers who purchase all or nearly all of their needs from the seller. Sellers of multiple products might use bundled discounts. Bundled discounts are alleged to be anticompetitive when a discount on multiple products is so attractive that competitive sellers of the product for which the firm faces more competition (the "competitive product") cannot compete effectively and the lack of competition leads to higher prices for the competitive product

Loyalty and bundled discounts are a complex issue, and there is a lack of consensus within the academic and legal communities about how they should be evaluated. Bill Baer, Assistant Attorney General of the DOJ's Antitrust Division, and Maureen Ohlhausen, FTC Commissioner, recognized the complexity in their opening remarks. They pointed out that lower prices are generally understood to be good for consumers, but asserted that certain types of discounts may, in some cases, lead to anticompetitive harm. Both Baer and Ohlhausen stressed the importance of promoting predictabilityand fairness in the law, and recognized that conditional pricing arrangements, such as loyalty and bundle discounts, are common throughout the economy.

The agencies' primary interests and concerns about conditional pricing practices seemed most evident during the final session of the workshop, moderated by Deborah Feinstein, Director of the FTC Bureau of Competition, and Renata Hesse, Deputy Assistant Attorney General of the DOJ Antitrust Division. One of the first questions they asked panelists was whether there is a consensus that the "price-cost" safe harbor should be abandoned. While forms of the price-cost test vary, all require the plaintiff to prove that the defendant sold the competitive product at a price below an appropriate measure of the defendant's costs. The test creates an effective safe harbor for discount programs. A few workshop panelists, including lawyers who counsel clients on discounting issues, supported continued use of the price-cost test. Supporters noted that a bright-line safe harbor facilitates predictability. The majority of panelists, however, recommended abandoning the test for both bundled and loyalty discounts. Among those who were in favor of abandoning the test, a few cautioned against any bright-line test or safe harbor, and recommended instead a case-by-case evaluation of a given discount's likely competitive effects. Courts are currently split on whether and how to use the price-cost test for bundled discounts. Courts are also mixed on treatment of loyalty discounts.

Hesse and Feinstein also asked whether the agencies should worry about conditional pricing facilitating collusion. Although traditionally the competitive harm, if any, thought to come from conditional pricing arrangements is exclusion, more than one panelist suggested that conditional pricing practices may also facilitate collusive agreements. For instance, retailers or distributors might seek loyalty or bundled discounts from upstream sellers to facilitate price coordination at the downstream level. Such a scheme might aid collusion by increasing transparency in costs among downstream competitors or reduce the number of upstream competitors, leading to higher upstream prices and higher downstream costs, and ultimately supporting a commitment to higher downstream pricing. Other panelists cautioned against focusing too much on a collusive theory of harm, because litigants typically do not complain about collusive effects of conditional pricing.

Finally, Feinstein and Hesse asked whether, and in what way, the agencies ought to credit cost-saving efficiencies in their analysis. Throughout the workshop, panelists recognized and even highlighted that loyalty and bundled discounts are consistent with sellers' efforts to reduce costs and improve their products. Lower costs and better products are generally thought to be good for consumers. For instance, bundled discounts can lead to lower shipping and restocking costs. Similarly, manufacturers' loyalty discounts can encourage distributors to invest in promoting a product and providing a higher level of service to consumers. Some panelists emphasized that these sorts of pro-competitive justifications are evident because the same discounting methods are commonly used by non-dominant firms when there is no risk of an exclusionary effect. A few panelists questioned whether sellers should be required to use the least restrictive mechanism for achieving the cost savings.

Despite the lack of consensus among the workshop participants, many agreed that more empirical evidence would be critical in order to move forward intelligently. The agencies are accepting public comments on this topic until August 22, 2014.

© Arnold & Porter Kaye Scholer LLP 2014 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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