This presentation by Alison Jones - King's College London, was made during a roundtable discussion on Fidelity Rebates held at the 125th meeting of the OECD Competition Committee on 16 June 2014. More papers, presentations and contributions from delegations on the topic can be found out at www.oecd.org/daf/competition/fidelity-rebates.htm

1. OECD Roundtable on Fidelity
Rebates
16 June 2016
Session 1: Terminology
Alison Jones, King's College London

2. Potentially problematic ‘low’ pricing practices
Predatory Pricing
Selective Price Cuts
Margin/ Price Squeeze
* Rebates
Price Discrimination
Alison Jones, King's College London

3. 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 sessions
Alison Jones, King's College London
Can have loyalty-
inducing or suction
effect (de facto share
of need rebates)*

4. 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
Alison Jones, King's College London

5. OECD Roundtable on Fidelity
Rebates
16 June 2016
Session 2: Legal framework
Alison Jones, King's College London

6. 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
Alison Jones, King's College London
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’

7. 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?
Alison Jones, King's College London
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)

8. 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 contested
US: no Supreme Court opinion, splits in circuits – area where plaintiffs are still winning cases
(at least if defendant very high market shares)

9. 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
Alison Jones, King's College London

10. Price-cost rule
US:
• 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

11. 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?
Alison Jones, King's College London

12. 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)
Alison Jones, King's College London

13. 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

14. 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
Alison Jones, King's College London