ECONOMIC ANALYSIS OF LOYALTY DISCOUNTS AND REBATES AND THE ECONOMIC AND LEGAL ASPECTS OF ALTERNATIVE TREATMENTS

ECONOMIC ANALYSIS OF LOYALTY DISCOUNTS AND REBATES
AND THE ECONOMIC AND LEGAL ASPECTS OF ALTERNATIVE
TREATMENTS
LL.M. – “The Role of Economic in Competition Law”
Submitted by
Luciana B. Ramondetti
Tutor: David S. Evans
1 July 2005
UCL - University College London

Table of Contents
I. Introduction……………………………………………………………………1
II. Concept of Loyalty Discount and Rebate………………….…...…………...4
A. Types of Loyalty Discount and Rebate…………………………………..5
1. Fidelity Rebate………………………………………………………….5
2. Target Rebate…………………………………………………………...7
3. Bundle Rebate.………………………………………………………….8
III. The Recent Legal Controversy…………………………………………….10
A. The British Airways case………………………………………………..11
B. The Michelin II case…………………………………………………….12
C. The LePage’s case………………………………………………………14
IV. The Economic and Legal Implications of Loyalty Discounts……………16
A. The Role of Costs ………………………………………………………18
B. Assigning Loyalty Discounts…………………………………………...20
1. Predatory Pricing……………………………………………………...21
2. Bundling and Tie-in Sales……………………………………………..23
3. Exclusive Dealing……………………………………………………..25
4. Price Discrimination…………………………………………………..26
C. Loyalty Discounts’ Outcome…………………………………………...29
1. Foreclosure Effect…………………………………………………….30
1.1 The Length of the Reference Period ………………………………33
1.2 The Role of Switching Cost……………………………………… .34
2. Efficiencies’ Benefits………………………………………………….35
V. Alternative Treatments………………………....…………………………...38
A. European Community Tests…………………………………………….39
B. US Jurisprudence Tests. ………………………………………………..40
VI. Conclusion………..……………………...………………………………….43
Bibliography……………………....…………………………………………….44
Table of Guidelines and Reports………………………………………………46

I. Introduction
Discounts or rebates are common practices in the market. They play a
major role in the way suppliers compete on price and try to attract consumers to
themselves and away from competitors.1
The most common and least contentious
discount practice is the so-called quantity rebate. In this pricing structure a firm
applies a standard rate of discount to all customers who have reached a certain
threshold in the quantity bought. If a firm is able to grant a profitable discount,
this is an economic efficiency and should not at first be considered
anticompetitive. However, loyalty discounts may be against competition if they
are granted in an exclusionary form and restrict consumer’s capacity of freely
choosing a supplier. It could be argued that, although the customer is tied to one
specific firm, it is benefited from a lower price and, consequently, the discount
raises consumer welfare. In the short-run, a consumer may indeed benefit from
lower prices. However, competition concerns arise in relation to equally efficient
rivals that cannot cope with such pricing schemes. Thus, exclusionary rebates tend
to be considered unlawful mostly for their ability to drive competitors out of the
market or to increase the barriers for new entrants.
Pricing policies have received a great attention from competition
enforcement authorities. Yet most decisions that have condemned discounting
practices as abusive have been criticised for not establishing general principles
and for lacking a sound economic approach. It is indeed in this area that the
European Union (“EU”) competition enforcement practices have a considerable
divergence from US antitrust law. In Europe, an abuse of dominance is mostly
based on the objective of the strategy, more than its practical or possible
consequences. This means that the firm’s intention in applying such strategy is
already unlawful, rather than its actual possibility to harm competition.
Conversely, the United States (“US”) case law tends to focus on the realised or
tangible effects of a firm’s policy and, in the absence of significant proof of anti-
competitive effect, US Courts are likely to conclude that there is no violation. Up
1
Jones, A. and Sufrin, B. EC Competition Law Oxford University Press, 2nd
Edition, 2004, p 419.

to the present moment, there have been few cases that have focused directly on
rebates schemes. In the European jurisdiction, two leading cases have provided a
more extensive analysis of rebate schemes: Virgin/British Airways2
and Michelin
II3
. In the U.S. antitrust jurisprudence, Orhto Diagnostics Sys., Inc. v. Abbott
Lab.,4
presented a cost-based analysis used in predation case law, that was later by
the approach taken in LePage’s v. 3M.5
There is a historical reason for the difference between the European and
American perspective regarding abuse of dominance or monopolisation. The
origin and development of the European Community (“EC”) Treaty6
regarding
competition law was based on the German ordoliberal tradition. This ideology in
the early 1920’s distinguished “performance based competition” from
“impediment competition.” This distinction was based on the view that small and
medium enterprises “required protection against unfair limitations on their
commercial autonomy.”7
Therefore, if conduct was performance based it could
not be prohibited even if it was able to harm competitors. Nevertheless, loyalty
discounts were considered by some commentators as a conduct that was not based
on performance and, consequently, an impediment competition. Conversely, the
U.S. decisions tend to follow a rule of reason approach. This method relies on the
economic perspective for proving a case and “if an anticompetitive effect is
found, a rule of reason analysis would consider any efficiencies that might result
from the practice.”8
Despite these background differences, both jurisdictions have been
influencing each other and moving towards a more reasonable approach to pricing
2
OJ [2000] L 30/1, [2000] 4 CMLR 999.
3
OJ [2002] L 143/1, [2002] 5 CMLR 388.
4
920 F. Supp. 455, 469 (S.D.N.Y. 1996).
5
324 F.3d 141 (3d Circ. 2003).
6
The EC Treaty, also known as the Rome Treaty, was established at 1957. It consists of 314
Articles and the EC competition law is contained in Article 81 to 89. “In understanding these
provisions, it is necessary to read them in conjunction with the principles of the Treaty laid
down in its early Articles.” Whish, R. Competition Law LexisNexis Butterworths, Fifth Edition,
p 50.
7
Kallaugher, J. and Sher, B. “Rebates Revisited: Anti-Competitive Effects and Exclusionary
Abuse under Article 82” European Competition Law Review (2004) p 269.
8
Balto, D., Tom W. and Averitth N. “Anticompetitive Aspects of Market-Share Discounts and
Other Incentives to Exclusive Dealing”, 67 Antitrust Law Journal 615 (2000) p 2.

structures. Most importantly, numerous economic and legal scholars have
provided analyses that try to balance too strict and too permissive rules. On the
one hand, a strict antitrust intervention that restricts a firm’s ability to compete
would end up protecting one or more competitors, instead of the natural process of
rivalry between them.9
On the other hand, permissive rules could allow conduct
that directly hurts consumers by not encouraging competition on merits.
This dissertation, based on recent controversial cases, provides an
economic analysis of discounting structures and examines recent proposals of
practical legal tests. Section II introduces the concept of loyalty discounts by
differentiating the three main types commonly applied. Section III provides a brief
introduction of two recent European cases and a recent American case, and the
relevant reasons why these cases were considered controversial. Section IV begins
with an introduction to several economic concepts. It is followed by an analysis of
both pricing and non-pricing structures that have similar characteristics or effects
to loyalty discounts. Finally, it ends with the major pro and anti-competitive
outcomes of these pricing schemes. Section V examines the tests applied by both
EC and US Court to assess the legality of a loyalty discount scheme. Section VI
concludes.
9
Gyselen, L. “Rebates: Competition on merits or exclusionary practice?” 8th
EU Competition Law
and Policy Workshop, European University Institute (2003) para. 10.

II. Concept of Loyalty Discount and Rebate
“Rebates” and “discounts” could be considered synonyms, since both are
deductions made from the price in order to encourage customers to do business
with the supplier rather than with competitors.10
However, there is a slight
difference, especially with regards to how and when the payment is made.
Discounts usually are granted at the moment of payment and are related with a
specific purchase. Rebates are based on a longer period of time and the customer
receives a retrospective cash payment calculated on its purchases. These pricing
policies are very common market practice. By offering lower prices, firms
generally encourage consumption and enhance competition. Moreover, depending
on the market’s condition firms can reasonably claim that by having regular and
predictable orders they can save costs, which explains the possibility of giving
greater deductions on price.
Hence, not all discounts or rebates should be classified as anti-competitive.
According to recent judgments, the case law regarding loyalty rebates seems to
lack a sound economic scrutiny and “it is indeed in this area that the EC
Commission has adopted most of its prohibition decisions and has followed pretty
much of a per se approach in doing so…”11
On the other hand, the Office of Fair
Trading (“OFT”) Assessment of Individual Agreement and Conduct 12
guidelines
clearly states that competition law should not consider these pricing practices
abusive, unless there is evidence that it harms (or is likely to harm) competition.13
Economic literature has also presented several economic tests that show the
efficiencies of rebates schemes and has attempted to set out some practical
methods of assessing dubious pricing practices.
Although the case law shows a great tendency to adopt a per se illegality,
the following sections will try to demonstrate why this appraisal is not an
10
Goyder, D.G. EC Competition Law Oxford: Oxford University Press, (2003) p 291.
11
Gyselen, L. Id. note 9 para. 2.
12
OFT Guideline Assessment of Individual Agreement Conduct 414a.
13
Id. para 5.1.

appropriate one. Hence, judgments based on an economic scrutiny serve not only
as guides in assessing practical matters, but also as suggestions for further
legislation revision.
A. Types of Loyalty Discounts and Rebates
Loyalty discounts, rebates and related schemes have different
denominations across legal and economic literature. For the purpose of this paper,
loyalty discount designate a broad concept of price deduction. In other words,
loyalty discounts comprise any type of scheme that has a retrospective percentage
applied on total sales over a reference period and is conditioned to the fulfilment
of certain conditions. There are three main types of loyalty discounts and they
vary according to the target or the object of the discount.
1. Fidelity Rebate
Fidelity rebate, also known as market share discount14
can be defined as a
discount given to a customer as a reward for buying all or most of its
requirements from the discounter. Customers, therefore, are not formally
obliged to buy their requirements with the supplier, since there may or may
not exist a formal agreement. Even though there is no formal obligation, there
is great pressure of accomplishing the target, as the larger the share of the
requirement bought from the supplier, the greater the discount. Thus, fidelity
rebates can harm competition when the inducement caused by the promise of a
significant discount and the accompanying incapacity of competitors to
compensate the losses caused by switching suppliers is so great that it could lead
the customer to deal exclusively with the discounter. Hoffmann-La Roche v
Commission15
was the first case that condemned fidelity rebates as unlawful by
14
Mills, David E.; “Market Share Discounts”; 2004; Department of Economics, University of
Virginia: “’Market share discounts’ are discounts that a manufacturer offers its distributors or
retailers if their sales of the manufacturer’s brand comprise a sufficiently high percentage of
their total sales of a given class of goods”.
15
Case 85/76 [1979] ECR 461, [1979] 3 CMLR 211.

comparing them to exclusive purchasing agreements. The European Court of
Justice (“ECJ”) held this practice as an abuse of dominant position, as follows:
‘The same applies if the said undertaking, without tying the purchasers
by a formal obligation, applies, either under the terms of the
agreements concluded with these purchasers or unilaterally, a system
of fidelity rebates, that is to say discounts conditional on the
customer’s obtaining all or most of its requirements – whether the
quantity of its purchases be large or small – from the undertaking in a
dominant position’.16
Since fidelity discounts are applied to specific purchases, it could be
difficult to differentiate them from a pure quantity discount17
. “In Irish Sugar the
Commission described quantity discounts as ‘normally unobjectionable’ and said
they are “normally paid in respect of individual order (i.e. unrelated to the
customer’s purchases over a period of time) and in return for cost savings
achieved by the supplier.”18
For example, a discount of 50 percent on a minimum
purchase quantity (given under the same conditions) to customer A and B could
only have loyalty enhancing effects to B if for the later it represents 90 percent of
its requirements and only 20 for A. Moreover, in the Deutsche Post19
case the
difference between quantity rebates and fidelity rebates was clearly stated. The
former is solely related with quantity bought and it is applied equally to all
customers. On the other hand, if the conditions regard their capacity of absorption,
it will be treated as a fidelity rebate and condemned as a serious infringement20
. In
other words, “the determining factor would be whether the minimum purchase
16
[1979] ECR 461, [1979] 3 CMLR 211, para 89.
17
Quantity discount is “a price reduction available only to purchasers of at least some minimum
quantity.” (Black, J. Dictionary of Economics Oxford University Press). In other words, quantity
discount is applied equally to all customers that achieve the minimum amount. Usually this
system is based on a linear rebate stages and the increase average rate slows down with the
growing amount of supply until it stabilises when approaching the maximum rebate rate.
18
Jones, A. and Sufrin, B Id. note 1 p 357.
19
OJ [2001] L125/27, [2001] 5 CMLR 99.
20
Whish, R. Id. note 6 p 698.

quantity corresponds to a significant number of a buyer’s probable total or near
total requirement in the period referred to.”21
2. Target Rebate
The second type of loyalty discount is called target rebate or growth
rebate. This discount is not calculated from the customer’s requirement, but from
the amount purchased during the previous reference period. It is individually and
selectively paid according to the quantity bought that exceeds from the prior
period. Since the discount is conditioned to the increase of purchase, “if the
natural growth in the customer’s market is insufficient to require such an
increased volume, this sort of discount may provide an incentive for the customer
to increase its purchases from (or its ‘loyalty’ for) this supplier at the expense of
others.”22
In the first Michelin23
case the Commission not only objected the
duration of the reference period, but also the lack of price transparency. This
decision was upheld on appeal and regarding price transparency, the ECJ24
stated
that the customers “are left in uncertainty and on the whole cannot predict with
any confidence the effect of attaining their targets or failing to do so.”25
According to case law, a target rebate may constitute a violation of Article
82 (c) EC if by discriminating between the buyers according to their volume
purchased, the discounter can apply different conditions to equivalent
transactions. In British Airways v. Commission26
, for example, each travel agent
was granted a different rebate according to the percentage of increase in sales of
BA tickets. This pricing scheme “led to different rebates for travel agents which
had the same increase rate depending on their respective sales in the previous
year.”27
Moreover, this rebate could also be regarded as unlawful if the
21
OECD Competition Committee “Loyalty and Fidelity Discounts and Rebates” (2003)
Background Note p 20.
22
OFT “Assessment of Conduct”. 2004.
23
OJ [1981] L 353/33, [1982] 1 CMLR 643.
24
Case 322/81 [1983] ECR 3461.
25
Case 322/81 [1983] ECR 3461 para 78.
26
Case T-219/99 OJ [2000] L 30/1
27
Kamann, H and Bergmann, E. “The Granting of Rebates by Market Dominant Undertakings
under Article 82 of the EC Treaty.” European Competition Law Review (2005) III.3.

uncertainty wields enough pressure for the customer to deal exclusively with the
supplier. Like exclusive dealings, target rebates could increase the competitors’
restraints to enter or stay in the market. These possible anti-competitive effects,
such as price discrimination and the foreclosing effect, will be analysed in more
detail below.
3. Bundle Rebate
Finally, there is a third type of loyalty discount named bundled or tying
rebates. It follows the principles of tie-in sales “in which a consumer can buy one
good only by purchasing another good as well”28
But, in this case, the customer is
not directly obliged to buy the other good, but is induced by the discount offered.
The discount is applied on the whole purchase, but it will only be granted if the
customer also buys another good (tying product) when it buys one good (tied
product). This pricing policy could be a strategy of a firm that is dominant in the
tied product market and wants to increase its profits in the tying product market,
in which it does not have a considerable market share. Although there is an
economic justification for such practices, it could harm competition if it generates
a foreclosure effect on the competitive market. This effect may occur especially
because of a high switching cost to a rival of the tied product.
This type of rebate can also serve as a powerful mechanism for a
monopolist with multiple product lines that wishes to expand its market power. To
illustrate, consider that a Firm X offers products A, B, C, and a smaller rival Firm
Y sells only A’. Firm X institutes a loyalty rebate scheme aggregated across its
three products with a progressive discount of one percent for each additional
1,000 units of A, B, and C that are purchased. A buyer that purchases 20,000 units
of each good would receive a twenty percent discount on all three. If this buyer
decides to buy only 10,000 from Firm X and 10,000 from Firm Y, its discount
from X would drop ten percent on each product, including B and C. Therefore,
Firm Y would have to offer a discount of thirty percent to compensate the loss
28
Carlton, D. and Perloff, J. Modern Industrial Organization Pearson Addison Wesley,
International Edition, Fourth Edition, (2005) p 319.

across all three products29
. This means that bundle rebates can have a foreclosure
effect especially on a single-product rival30
, since it has to offer a significantly
larger discount on its products to be able to compete with the rebate.
According to Hoffmann LaRoche,31
bundle rebates may also violate
Article 82 (d) EC Treaty32
if the contract terms subject the discount to the
purchase of additional products that are not interchangeable. The Court
considered that such terms do not have a trade usage justification and, therefore,
should be regarded as abusive. Moreover, this rebate could also be considered a
so-called “monopoly leveraging”, when a firm with monopoly in one market uses
its power to gain monopoly power in another,33
in a manner which does not
correspond to normal ways of competition. Finally, the discriminatory or
restrictive effect of bundle rebates depends on the circumstances of each case and
its economic justification.
29
This example is taken from: Arreda & Hovenkamp; “Antitrust Law”; 2003; p. 749.
30
This rival can be equally efficient, but by offering just one product it will face a greater restraint
if customers are willing to buy the other products offered by the discounter.
31
Id. note 15 para 111.
32
The Article 82 (c) EC Treaty states that a dominant firm will abuse its dominant position by
“making the conclusion of contracts subject to acceptance by the other parties of supplementary
obligations which, by their nature or according to commercial usage, have no connection with
the subject of such contracts.”
33
Fisher, F “Innovation and Monopoly Leveraging” Massachusetts Institute of Technology (1999)
p 1.

III. The Recent Legal Controversy
As described above, the approach of the European Commission in relation
to loyalty discounts has attracted much controversy. By adopting a per se
illegality or focusing mainly on the object of the discount rather than its practical
consequences, the case law has considered such practices unlawful even when
competitors could have coped with such restraint.34
Two recent cases under
European law, British Airways v. Commission35
and Michelin v. Commission36
,
have condemned loyalty discounts schemes as abusive under Article 82 of the EC
Treaty. In both cases, the CFI upheld the Commission’s findings that these
practices amounted to an abuse of a dominant position. However, these decisions
were criticised for the lack of practical and sound economic analysis. The main
criticism is that these decisions tended to protect inefficient competitors and were
excessively restrictive for firms willing to compete solely on merits.
On the other hand, the U.S. antitrust enforcement rules focus mainly on
the practical and visible consequences on market. Similarly to the above
mentioned cases, in LePage’s Inc. v. 3M37
the Third Circuit held that 3M’s loyalty
rebate programme constituted exclusionary conduct and violated section 2 of the
Sherman Act. The American case law regarding loyalty rebates is also criticised
for its too rigid standard of exclusionary effect, allowing firms to engage in anti-
competitive conducts to the detriment of consumers. Therefore, a comparative
study of both jurisdictions’ cases would be clarifying and “a more sensible
approach based on the ability of an equally efficient competitor to match the
pricing policy of the dominant firm may be a constructive way forward in both
jurisdictions.”38
34
See Ehlermann, C. and Ratliff, J. “Mario Monti’s Legacy for Competition Policy in Article 82”
Competition Policy International (2205).
35
Id. note 2.
36
Id. note 3.
37
Id. note 5.
38
“Pricing below cost and loyalty discounts: are they restrictive and if so when?”; Heimler, A.

A. The British Airways case
British Airways operated three performance reward schemes for travel
agents based in the United Kingdom, which were all conditioned to these agents
meeting certain individualised volume targets during a reference period. Once the
target for sales growth was met, the travel agent would receive an increase in the
commission paid. The Commission’s decision - which was upheld by the CFI –
considered BA’s rebate schemes as an abuse of its dominant position in the
market for air travel agency services. However, the constraint was not the rebate
itself, but how it was calculated. It was based on the total tickets sold by the agent,
and not on the tickets that exceed the target, which led to a great effect on margin.
The Commission concluded that BA had the intention of excluding its
competitors, as follows:
“This means that when a travel agent is close to one of the thresholds
for an increase in commission rate selling relatively few extra BA
tickets can have a large effect on his commission income. Conversely
a competitor of BA who wishes to give a travel agent an incentive to
divert some sales from BA to the competing airline will have to pay a
much higher rate of commission than BA on all of the tickets sold by it
to overcome this effect.”39
In addition, the BA scheme was also considered discriminatory under
Article 82 (c) EC Treaty, which states that a dominant firm’s practices are
regarded as abusive when “applying dissimilar conditions to equivalent
transactions with other trading parties, thereby placing them at a competitive
disadvantage.” Since the rebates were based on each agent’s increase of previous
performance in selling and not on a standard quantity of tickets sold, travel agents
could receive the same rebate even if they have sold a different number of tickets.
Moreover, the CFI also condemned the reward scheme as loyalty-inducing owing
to its progressive nature. Considering that targets were determined in relation to
the previous reference period, the Court assumed that rates could rise
39
Id. note 2 para 29.

exponentially during reference periods and have a very noticeable effect on
margin.
However, the Commission analysis of the relevant market40
has been
considered by a number of commentators abstract and incomplete for several
reasons. Firstly, it did not take into account that British Airways’ market share
was around 50% and competitors had also to compete with other airlines. It has
based its calculations on the effect that this scheme would have on a new entrant
trying to realise 2% of BA’s market.41
Secondly, the Commission disregarded the
ability of competing airlines, especially Virgin, to run profitably even with the
existence of the scheme, or if they could match such a policy. Furthermore, the
Court upheld the Commission’s view that “the fact that the market share of some
of BA’s competitors had actually increased during the relevant period did not
disprove the exclusionary effect of the commission payments (paragraph 298).”42
Finally, the exclusionary effect was assumed without any analysis of “whether
consumers could actually be misled by travel agents that would hide a less
expensive alterative in order to achieve the British Airways target.”43
B. The Michelin II case
In the second Michelin case, the Commission regarded the system of
loyalty-inducing rebates to dealers in new replacement tyres and retreated tyres
for trucks and buses unlawful and against competition. Michelin, however,
contested that the Commission had failed to take into account its decreased market
share and lower general price levels during the period in which the discounts were
in place. The rebate system adopted by Michelin was similar to BA’s rebate
40
Defining the relevant market is an important issue when an abuse of dominance is being
accessed. The European Commission’s Notice on the Definition of the Relevant Market for the
Purpose of Community Competition Law explains: “The objective of defining a market in both
its product and geographic dimension is to identify those actual competitors of the undertakings
involved that are capable of constraining those undertakings’ behaviour and of preventing them
from behaving independently of effective competitive pressure.” (OJ [1997] C 372/5, [1998] 4
CMLR 177, para 2)
41
Heimler, A. “Pricing below cost and loyalty discounts: are they restrictive and if so when?”
(2004). http://ssrn.com/abstract=634723 p 10.
42
Jones, A. and Sufrin, B. Id. note 1 p 445.
43
Heimler, A Id. note 41p 10.

scheme with regards to the condition of achieving individualised targets in order
to be entitled to the reward and for being calculated on the total sales rather than
on incremental sales. Therefore, the Michelin scheme was also considered
discriminatory and exclusionary.
The rebates were granted annually according to the turnover achieved with
Michelin France. Since the rebates were calculated on the entire turnover achieved
and about one year after the first purchase, it was not possible for the dealers to
determine the actual unit price before placing their last orders.44
In addition, the
Commission considered the market as intensely competitive and with low level of
margins, which forced dealers to resell at loss pending the payment of the
rebates.45
Michelin also offered a ‘service bonus’ as an incentive to improve
equipment and after-sales service. Although the bonus rates were established at
the beginning of the year, they were conditioned to the compliance with various
commitments offered. Each commitment corresponded to a number of points and
after exceeding certain points thresholds, the dealer was granted a bonus based on
the turnover achieved with Michelin. The Commission considered that the
granting of the points was somewhat subjective and gave Michelin a margin of
discretion in its assessment46
.
The CFI confirmed that the Commission had correctly characterised the
rebates as loyalty-inducing and abusive. The Court rejected Michelin’s defence
that the rebates had economic justification, since Michelin had not provided
evidence in this regard. Moreover, the annual reference period were contested
mainly because “the loyalty-inducing nature of the discount calculated on total
turnover achieved increases in proportion to the length of the reference period.”47
The Court also considered that the rebates formed part of a complex system of
discount, and extremely difficult for a customer to calculate the exact price of
44
45
Id. para 218.
46
Id. para 250.
47
Id. note 3 para 85.

Michelin’s tyres. Therefore, the Court concluded that this “situation inevitably put
dealers in a position of uncertainty and dependence on the applicant.”48
Although the CFI’s judgement has provided some important principles,
such as: the inexistence of a specific rule regarding the reference period
duration;49
and that pure quantity rebates will be presumed to reflect cost-savings
or other economies of scale.50
The decision was criticised for its formalistic
approach. First, the Court stated there is no need to show the likelihood of actual
anticompetitive effects, but only that the conduct is capable of having that effect.51
Thus, the Court discharged the need of any economic analysis of the actual
consequences on market, and relied its disapproval solely on the firm’s intention.
Secondly, the Court suggested that economic efficiency consequences could
justify the granting of rebates. However, it did not undergo any economic scrutiny
and only stated that Michelin had not provided enough proof of efficiency.
C. The LePage’s case
LePage’s, a producer of second-brand and private-label transparent tape,
sued 3M, claiming that the rebate schemes offered by the defendant were an
illegal attempt to drive LePage’s out of the market. 3M was a dominant firm of
transparent tape, holding above 90% of the market. After LePage’s entered and
started competing in the same market, 3M began to offer higher rebates to
consumers buying products in a number of its products lines. LePage’s submitted
that LePage’s price structure was a means to encourage customers to enter into
exclusive dealing arrangements. The Court found that 3M’s loyalty rebate
programme constituted exclusionary conduct in violation of section 2 of the
Sherman Act.
48
Id. para 111.
49
Id para 85: “Admittedly, contrary to what the contested decision suggests (recital 216), the Court
of Justice did not expressly hold that the reference period could not exceed three months.”
50
Id para 58: “Quantity rebates are therefore deemed to reflect gains in efficiency and economies
of scale made by the undertaking in a dominant position.”
51
Id. para 239.

Moreover, 3M relied on Brooke Group Ltd. v. Brown & Williamson
Tobacco Corp.52
which directly stated that “above-cost prices that are below
general market levels or the costs of a firm’s competitors [do not] inflict injury to
competition cognisable under the antitrust laws.”53
However, the Third Circuit
disregarded the defendants argument that it has never priced its tapes below its
cost, and held that the scheme was exclusionary conduct by a monopolist apart
from below-cost predatory pricing principles, as follows:
“Assuming arguendo that Brooke Group should be read for the
proposition that a company’s pricing action is legal if its prices are
not below its costs, nothing in the decision suggest that its discussion
of the issue is applicable to a monopolist with its unconstrained
market power… 3M is a monopolist; a monopolist is not free to take
certain actions that a company in a competitive (or even
oligopolistic) market may take, because there is no market constraint
on a monopolist’s behaviour.”54
Lastly, the judgement in LePage’s has raised concerns from the legal and
economic communities mostly because the thresholds for demonstrating
exclusionary conduct were too low. By disregarding 3M’s defence of not offering
below-cost prices and by not demanding LePage’s to prove its inability to
compete with 3M’s loyalty rebate programme, the Court focused more on the
defendant’s intentions rather than any business justification. The main criticism,
therefore, is that unreasonable prohibition of loyalty discounts discourages
legitimate competition or even protect inefficient competitors.
52
509 U.S. 209 (1993).
53
Id. para 223.
54

IV. The Economic and Legal Implications of Loyalty
Discounts
In a perfectly competitive market firms are price-takers, their own policies
do not directly affect the market and, hence, they must take the price as given.55
This is an ideal situation in which there are plentiful well informed buyers and
sellers, and goods and services can be bought or sold without affecting the market
price. However, most markets are not perfectly competitive and firms have to
adopt different strategies in order to run profitably56
. The economic efficiency of
competitive markets relies on the fact that firms, in order to compete with the
existing or potential competitors, seek to produce the highest level of output at the
lowest possible cost so that they can meet a competitive price.57
Accordingly, a
competitive market is a desirable situation and competition is the strength for
firms to achieve economic efficiency.
In addition, by trying to enhance their performance, firms may indeed
achieve a superior efficiency58
and conquer substantial market power or achieve
economies of scale59
. Dominant firms, therefore, have more discretion over their
policies and decisions, so that they do not necessarily attempt to predict their
competitors’ behaviour. Indeed, dominant firms have more freedom from
competitive constraint and can item restrict output and thereby increase price
above competitive level.60
It is mainly because of this discretion over the market
that dominant firms receive special attention from most antitrust laws. Under the
EC competition law, Article 82 “is one of the pillars of the ‘system ensuring that
55
Carlto, D. and Perloff, J. Id. note 28 pag 290
56
Id. note 55.
57
See Carlto, D. and Perloff, J. Id. note 28, chapter 3.
58
Efficiency, in this case, does not only mean the firm’s capacity of “getting any given result with
the smallest possible inputs, or getting the maximum possible output from given resources”
(“Dictionary of Economics”, 2003, Oxford); but also the ability of become well known in the
market for its brand, superior goods quality, well conducted advertisement campaign or any
other differential.
59
Economies of scale are achieved when average costs for a given increase in output level falls as
output increases. This happens mainly because fixed costs can be spread over a greater sales
volume until capacity constraints are reached. See below chapter IV, “A. The Role of Cost.”
60

competition in the internal market is not distorted’, set down in Article 3(1)(g)
EC.”61
Hence, the main goal of Article 82 when it avoids unilateral activities that
potentially distort competition is to protect the competitive process and
competition on merits. However, by protecting the process of rivalry, the antitrust
enforcer’s ultimate objective is to ensure the consumer welfare. Therefore, “the
protection of the competitive process is motivated by the idea that consumers are
best served if firms are forced to compete, and are at the same time protected in
their effort to compete on merit.”62
Nevertheless, the crucial difficulty of policy makers is when antitrust rules
should substitute “the insufficient constraints of Adam Smith’s invisible hand of
competition by the rather more visible hand of public intervention.”63
In other
words, how antitrust rules can protect competition and provide consumer welfare
without protecting competitors, especially the less efficient ones. In the light of
pricing practices, the lack of economic analysis has proven to be one of main the
reasons for unsatisfactory decisions. Luc Gyselen64
has implied that regarding
exclusionary practices two main questions should be addressed: (1) what degree
of foreclosure the Commission must demonstrate to justify its intervention; and
(2) what type of efficiencies the dominant company can invoke as objective
justification for whatever foreclosure its pricing practices may create. These two
questions address important principles when assessing loyalty discount schemes.
On one hand, there must be a foreclosure on market’s access, both by eliminating
competitors and by impeding new entrants. Assuming that a given rebate scheme
does have a foreclosure effect, what degree could legitimate a competition
authority intervention? On the other hand, even when such situation occurs, which
are the economic efficiencies and benefits that could counteract this
anticompetitive effect?
61
Eilmansberger, T.; “How to Distinguish Good from Bad Competition under Article 82 EC: In
Search of Clearer and More Coherent Standards for Anti-Competitive Abuses.” Common
Market Law Review (2005) p 133.
62
Id. pag 133.
63
Id. pag 134.
64
See note 9.

Before engaging in an analysis of the possible foreclosure effect of loyalty
discounts practices, and the potential justifications firms can invoke; this section
first provides a brief introduction to costs concepts, followed by the role they play
on pricing tests. Further, it studies some proposed analogies with different types
of pricing and non-pricing practices that have similar characteristics to loyalty
discounts.
A. The Role of Costs
Firms typically devote great attention to what it costs to produce their
products in order to make sensible business decisions. By producing output at the
lowest possible price, they achieve an efficiency that allows them to be more
competitive. However, firms incur in different types of costs and the outset may
raise serious problems of how to distinguish each one.65
In addition, most pricing
practices considered abusive under both European and American antitrust laws
have undergone a cost consideration. Therefore, a brief introduction to some
concepts of costs would be helpful not only to understand the firm’s business
policies but also to establish a framework that has guided most of case law
judgments and decisions and legal tests suggested.
The total costs incurred by a firm comprise the sum of all fixed and
variable costs. The fixed costs are an expense that does not vary with the amount
of output produced.66
For instance, the rent or property taxes must be paid
irrespective of the firm’s output. However, if a firm decides to go out of business
and according to its rental contract there are still several months left to be paid,
this amount is not recoverable. This portion of fixed costs that is not refundable is
denominated sunk cost. Another example of sunk costs is advertising expenditure
for promoting a new product, if this product fails, the amount spent will not be
recovered.67
The reason why this cost is not included in the total cost analysis is
mainly because these expenditures should not interfere in the daily basis
65
See Whish, R. Id. note 6 chapter 18 “I. Costs Concepts”.
66
Carlton, D. and Perloff, J. Id. note 28 p 29.
67

decisions, since “sunk cost is like spilled milk: Once it is sunk, there is no use
worrying about it, and it should not affect any subsequent decisions.”68
On the
other hand, variable costs are costs that vary with the level of output produced.
The firm’s expenditure changes as the output increases, so does the need of raw
material, labour, and maintenance costs. Therefore, the variable costs will depend
on the amount a firm spends on its inputs.
In addition, there is also the average total cost (‘ATC’), which is
calculated by the sum of both average variable cost (‘AVC’) and average fixed
costs (‘AFC’). A firm’s AVC is calculated by dividing all its variable costs by the
total of its actual output. This calculation indicates the average cost of each extra
unit produced. It differs from marginal cost (‘MC’) because the latter indicates the
additional cost that results from producing one more unit of output and therefore
relates to changes in cost, not to levels69
. Since average variable costs are easier to
identify tend to be the preferred standard in competition law.70
Moreover, if a
firm’s average cost falls as output increases the firm is said to have economies of
scale. In some industries it is possible to produce goods very cheaply and the
market for them can be very large. For instance, economies of scale can be
achieved if the firm applies higher specialised equipments or adopts division of
labour.71
This, therefore, may justify the ability of some firms to produce goods or
services more cheaply than others.
The European jurisprudence has showed that a pure quantity discount is
not considered abusive if it has an objectively identified cost savings. Although in
most of the cases there was no estimate of the actual savings, the need of an
68
Carlton, D. and Perloff, J. Id. note 28 pag 29.
69
“Imagine going into a supermarket to buy fruit. You carry a bag and put in some apples, which
naturally differ in weight. The total weight of the apples in the bag and the associated average
weight per apple are easily determined. Suppose you add a very small apple to your bag. Its
weight is the increment to the weight of the apples in the bag (the marginal weight). But the
weight of the small apple is less than the average weight of the apples already in the bag, so the
average weight falls. If, instead, you add a very large apple, its marginal weight exceeds the
average weight of the apples already in the bag, so the average weight rises. The marginal
weight is totally determined by the one additional apple. The average weight (after the
additional apple) is determined in large part by the apples that were already there. Analogously,
marginal cost can be either above or below average cost.” Carlton, D. and Perloff, J. Id. note 28
pag 30.
70
71
Black, J. Dictionary of Economics Oxford University Press (2003). “Economies of scale.”

economic analysis of cost savings to identify an abuse was clearly stated, like the
following assertion of the CFI in the BA judgement: “If the increase in the
quantity supplied is translated into a lower cost for the supplier, the latter is
entitled to give the customer the benefit of that reduction by means of a more
favourable tariff (...). Quantity rebates are thus deemed to reflect gains in
efficiency and economies of scale achieved by the dominant undertaking.”72
Nonetheless, European Courts have never acknowledged that discounts can be an
incentive mechanism to customers continuing to buy from the supplier, and turns
out to be cheaper than other forms of incentive.73
Conversely, the U.S.
discounting cases have often considered this a lawful practice, since “the standard
of proof remains that of classical predation, that is revenues below costs.”74
Moreover, most of cases involving loyalty rebates have been assessed as either
predatory pricing or exclusionary conduct.
B. Assigning Loyalty Discounts
Pricing schemes can be presented in several different forms and may have
more than a few similarities regarding either the way they are applied or the
effects they may cause. Loyalty discounts, as described above, have three main
categories, but have numerous outcomes. For instance, a fidelity rebate might be
considered as an exclusive dealing if it is required from the customer to buy
almost all of its requirements from the supplier; a target rebate may be regard as
price discrimination, when different rebates are granted for equal transactions;
even bundle rebates can clearly have the same foreclosure effect as tie-in sales
may cause. Moreover, a rebate can combine more than one feature if in one of the
latter examples a firm prices its goods below cost, leading to predatory pricing.
For this reason, examining these pricing policies and their possible similarity to
loyalty rebates would be clarifying.
72
73
Heimler, A Id. note 41 p 4.
74
Id. p 5.

1. Predatory Pricing
Predatory pricing implies pricing below some measure of cost with the
intention of driving rivals out of a market or preventing new firms from entering
the market. Consumers are benefited in the short run, but in the long run firms
will intend to increase prices above competitive levels in order to recoup the
losses experienced during the investment period. Therefore, the main
characteristics of predation are: (1) prices should be low enough to drive
competitor out of market; (2) new entry or re-entry is prevented75
; and (3)
dominant firms are able to increase their prices to recoup losses. In relation to the
third attribute, US and Europe Courts have different standards. US jurisprudence
has made it clear that recoupment must be feasible and only where there is a
practical evidence predation should be prosecuted. On the other hand, in Europe
“predation has been assessed on a somewhat weaker standard and recoupment has
not been considered essential.”76
This means that European courts condemn as
unlawful a firm’s intentions to charge above-competitive prices in order to
recover its losses, even when it may not be possible. Although there are some
divergences, both jurisdictions have accepted the need of a more economic based
approach, which leads to the conclusion that: “the underlying objective is, on the
one hand, to ensure that the chosen approach does not allow predatory behaviour
to go undetected, and, on the other hand, to allow firms to compete on price to the
widest possible extent.”77
However, pure predation is a risky practice and has been rarely
condemned under both US and EU laws. Firm’s concerns about engaging in a
predatory strategy relate basically to two considerations: first, firms incur in some
costs in the initial period, while future benefits remain uncertain. Secondly, firms
may have to invest in this strategy for a long time if the competitor does not exit
the market as expected. These are the reasons why predation is rare and firms tend
to seek for a safer harbour by applying predation in a selective way, like some
75
“This applies particularly where entry barriers or re-entry costs are high or the dominant firm is
active in several markets and acquires a reputation for taking drastic action against new entrants
in one of its markets.” Lang, J. and O’Donoghue, R. “Defining Legitimate Competition: How to
Clarify Pricing Abuses under Article 82 EC” Fordham International Law Journal (2002) p 24.
76
Heimler, A Id. note 41p 3.
77
Lang, J. and O’Donoghue, R. Id. note 77 p 25.

cases of loyalty discounts. Given the similar foreclosure effect that both predation
and loyalty discounts may cause, several economic and legal scholars have been
trying to develop a framework based on predation tests to help the evaluation of
rebates cases.
Areeda and Turner78
suggest that prices below AVC should be deemed
predatory and prices above AVC should be presumed lawful. This test relies
exclusively on cost analysis and disregards any evidence that the firm will be able
to recoup its losses, or if there is any intention to eliminate competitors. The
European jurisprudence shows that most of the cases regarding pricing below cost
have been considered unlawful. For instance, in AKZO v. Commission79
, the ECJ
endorsed the Areeda and Turner test when it decided that pricing below AVC by a
dominant firm is a per se illegality. The Court based its decision by considering
that the only feasible intention a firm may have in applying such practices is to
eliminate the competitors.80
Therefore, it can be concluded that the intention to
drive competitors out of market is presumed in cases where a firm prices below
AVC. On the other hand, in cases where prices are below ATC but above AVC, it
will only be considered illegal if the intention to eliminate competitors can be
proved as part of an exclusionary plan81
.
In addition, the ECJ in the Tetra Pak II,82
considered the intention to
eliminate competitors the main condition to condemn the conduct as exclusionary,
and that it was “not necessary to demonstrate that the undertaking in question had
a reasonable prospect of recouping losses so incurred.” On the other hand, under
US case law Brooke Group provides a stricter concept of predation. There the US
Court held that a claim alleging predatory pricing must not only prove that the
rival is charging below cost in order to eliminate competitors, but also
demonstrates that the recoupment is probable.
78
See Areeda and Turner ‘Predatory Pricing and Related Practices under Section 2 of the Sherman
Act’ 88 Harvard Law Review 697 (1975).
79
OJ [1994] L 294/31.
80
Id. para 71
81
Id. para 72.
82
O.J. L 72/1 [1992] 4 CMLR 551

However, other commentators advocate that loyalty rebates are not best
viewed as predatory pricing. According to this view, the foreclosure effect is not
merely related to low prices but “the concern is that the particular structure of the
prices is designed in such a manner that it amounts to a de facto exclusivity
requirement.”83
It is also said that loyalty discounts, like fidelity rebates or bundle
rebates, are best analysed as tie-in sales or exclusive dealing84
. Accordingly, the
US Court decision of LePage’s clearly determined that bundled rebates are
analogised more appropriately to tying than predatory pricing.85
Therefore, the
following section examines the similarities between loyalty discounts and tie-in
sales and bundling.
2. Bundling and Tie-in Sales
Bundling is the practice of selling two goods, A and B, together. If they
are not available for individual purchase, it is called pure bundling. However, if
they are also sold individually but the A-B package has a lower price than the
individual prices, it is called mixed bundling. On the other hand, tying is the
practice of requiring the purchaser of one product to also purchase a second
product. Customers may buy B (tying product) separately but A (tied product) is
only sold in an AB package.86
The difference between tying and pure bundling is
solely because in the latter neither of the goods is sold individually. Therefore,
some commentators classify tying as “a special case of bundling in which
consumers do not have the choice of buying the ‘tied’ product without the ‘tying’
product.”87
83
Balto, D., Tom W. and Averitth N. Id. note 8 p 11.
84
Greenlee, P., Reitman and Sibley, D. “An Antitrust Analysis of Bundle Loyalty Discounts”
Economic Analysis Group (2004) p 5.
85
Warren, J. “LePage’s v. 3M: An Antitrust analysis of Loyalty Rebates” New York University
Law Review (2004) p 1615.
86
Nalebuff, B. “Bundling, Tying, and Portfolio Effects”, DTI Economics Paper No. 1, Yale
University (2003) pag 11.
87
Evans, D. and Saliner, M. “Why Do Firms Bundle and Tie? Evidence from Competitive Markets
and Implications for Tying Law.” Yale Journal on Regulation (2004) p 6.
.

Bundling and tying, for several reasons, have business and economic
justifications that could also lead to a pro-competitive advantage.88
First, these
practices may be a sound strategy to save costs, since firms may achieve
economies of scale.89
For instance, if a manufacturer of several goods decides to
tie two products it would lead to cost savings of packaging, stocking or delivering.
Second, products may have a better efficiency if sold together, since “a firm may
assure quality by forcing customers to buy another if its products or services and
not to use substitutes.”90
Third, on the demand side, consumers could be better off
since prices would be lower, quality of the combined goods might be improved
and buying a package could be more convenient91
. Therefore, “economists
recognise that tying can result in cost savings for producers and consumers as well
as improvements in product quality.”92
However, in its Guidelines on Vertical Restraints93
the Commission stated
that if tying is not objectively justified by the nature of the products or
commercial usage, such practice may constitute an abuse. This concern relates
mainly to the potential foreclosure caused by a dominant firm that is willing to
expand its monopoly power in respect of the tying product to the tied product.94
In Tetra Pak II95
customers were required to purchase cartons (tied good) when
buying liquid packaging machines (tying good). The Commission decided that
cartons were a separate market and since it was not considered a commercial
usage, the Commission concluded that Tetra Pak was trying to eliminate
competitors. In the US jurisprudence tying has also been considered unlawful. In
88
See Nalebuff, B. Id. note 86.
89
90
Van den Bergh, R. and Camesasca, P. European Competition Law and Economics – A
Comparative Perspective Intersentia (2001) pag. 281.
91
The classical example o selling both left and right shoes together represent not only the
convenience for the customer, but also how “it may not be efficient to provide one of the
products separately even though some demanders might prefer that. Enough customers must
want the separate items to justify the extra costs. That is why it is not possible to buy left shoes
alone even though at least some people might want to do so—those perhaps with no right leg or
a dog who has eaten their left shoe.” Evans, D. and Saliner, M. Id. note 87 p 7.
92
Id. pag 5.
93
Commission Guidelines on Vertical Restraints, OJ [2000] C 291/1. [2000] 5 CMLR 398 para
215.
94
95
Tetra Pak II, Commission Decision 92/163/EEC, 1992 O.J. (L 072) 1; Case T-83/91 Tetra Pak
II, (1994) ECRII-755, pp 156-172.

Kodak,96
the tied good was repair and maintenance service of photocopier and
micrographic equipment. The US Supreme Court held that four conditions should
be satisfied: (1) if there are two different products involved; (2) whether the
defendant had required the tied product to be purchased with the tying product;
(3) if the inter-state commerce had been substantially affected; and (4) whether
the defendant had market power in the tying product.
In conclusion, loyalty discounts may have similar anticompetitive effects
to bundling and tying because consumers might have to choose between a
“collection of tied discount prices and unattractive standalone prices.”97
For
instance, bundle rebates have a great similarity to mixed bundling, since
discounters usually sell both goods separately, but offer an attractive rebate if they
are bought together.
3. Exclusive Dealing
Loyalty discounts can also be analysed under the context of exclusive
dealing frameworks. Exclusive dealing refers to agreements in which “the
purchaser is prevented from purchasing competing products from anyone other
than the dominant firm.”98
This type of agreement is mostly likely to harm
competition in one of the two following ways: (1) by facilitating collusion
between competitor; or (2) by eliminating competitors. Exclusive dealing
contracts facilitate collusion when “they help competitor overcome the obstacles
they face in attempting to maintain price above competitive levels.”99
Secondly,
the clear foreclosure effect of an exclusive dealing is mostly because it can raise
the competitors cost to access the market.
Moreover, in its Guidelines on Vertical Restraints,100
the Commission
(when defining the so-called ‘English Clause’101
) asserted that it can be expected
96
Eastman Kodak Co v. Image Technical Services Inc (1992) 504 US
97
Greenlee, P., Reitman and Sibley, D. Id. note 84 p 22.
98
Whish, R. Id. note 6 pag 654.
99
“Balto, D., Tom W. and Averitth N. Id. note 8 p 2.
100

to have the same effect as non-compete obligation. Further in the same paragraph,
the Commission concluded that “Article 82 specifically prevents dominant
companies from applying English clauses or fidelity rebate schemes.” In this case,
the comparison between exclusive purchase clauses and fidelity rebates is mostly
made on the basis that while the former clearly states the buyer’s obligation to
purchase all or most of its requirement from the supplier, the latter may achieve
the same result by offering a higher discount if the buyer does so.
In Hoffmann-La Roche,102
the ECJ compared exclusive dealing with
rebates schemes when it suggested that the former violates Article 82 EC,
“whether the obligation in question is stipulated without further qualification or
whether it is undertaken in consideration of the grant of a rebate.”103
In addition,
the BPB Industries v. Commission104
judgement considered that exclusive
dealings should not be a per se illegality, and that it is necessary to examine the
effect of such an agreement in its market context.105
However, the main “issue in
these cases is not whether the agreement is oppressive to the customer, but
whether it forecloses competition in the relevant market.”106
4. Price Discrimination
Discriminatory pricing is a common policy adopted by firms to increase
their profits. It is a profitable strategy because consumers that value the goods
most pay more than if prices were uniform.107
For instance, if a monopolist
charges a single price for all its customers, the price would be set so that its
marginal revenue equals its marginal cost108
. However, different customers have
distinct elasticity of demand and if a firm sets its prices according to the amount
101
English clause indicate a request to the buyer report any better offer and only accept it if the
supplier does not match it.
102
Case 85/76 [1979] ECR 461, [1979] 3 CMLR 211.
103
Id. para 89.
104
Case T-65/89 [1993] ECR II-389, [1993] 5 CMLR 32.
105
[1993] ECR II-389, [1993] 5 CMLR 3, para 66.
106
107
Carlton, D. and Perloff, J. Id. note 28 pag 293.
108
When marginal cost equals marginal revenue, the monopolist reaches the maximum single
price it could charge. This means that the extra revenue from selling one more unit just equals
the extra cost of producing that last unit of output.

that each customer is willing to pay both would be better off. To illustrate, “a
theatre might be able to sell 80% of its tickets to the public at £4 each, or
alternatively 100% of its tickets by charging 70% of its customers £5 and the
remaining 30% £1 (for example to impoverished students).”109
Consequently,
price discrimination can lead to an allocative efficiency110
, since the firm would
increase the quantity of output and have significant contribution to its revenue,
and the customers would get the products which they could not otherwise afford.
According to economic classification, there are three degrees of
discriminatory pricing: first-degree price discrimination occurs when firms can
charge the maximum price each consumer would pay and, therefore, consumers
are left with no consumer surplus111
. However, producers usually lack the
information needed to achieve such discrimination and it mainly operates as an
economic pattern. To illustrate112
, the chart below shows a uniform price charged
by a firm with a considerable market power. Between Q* and 0 is the consumer
surplus (A), which means how many consumers would be willing to pay if the
price was higher than Q*. Pc is the price that would exist if it was a perfectly
competitive market, however, the firm charges the P* where it reach the
maximum profit (MC=MR). If price is raised above P*, the firm will lose sales
and reduce profit, and above Q*, price would have to fall to create a consumer
surplus B. In this example, the firm is losing sales for those who would pay less
than P* (B) and losing extra profit from those who would pay more than P* (A).
109
110
“Allocative efficiency is achieved, as consumers can obtain the amounts of goods or services
they require at the price they are prepared to pay: resources are allocated precisely according to
their wishes.” Id p 3.
111
“Consumer surplus is the amount above the price paid that a consumer would willingly spend,
if necessary, to consume the units purchased.” Carlton, D. and Perloff, J. Id. note 28 p 70.
112
This example and the following graph in based on Pindyck, R. and Rubinfeld, D.
Microeconomics Prentice Hall, sixth edition, chapter 11.

Therefore, an alternative way to capture more consumer surplus would be
applying second or third-degree price discrimination. The second-degree
discrimination occurs when the producer does not have enough information about
which group each customer belongs to. In this case, the firm offers alternative
contracts or conditions that allow the customers to identify themselves. Finally,
the third-degree implies that the producer can identify different groups of
customers, and charge a different price of each group.113
Bundled rebate, for
example, is a type of third degree discrimination and it can be an efficient form to
“aggregate consumer surplus and total surplus can be higher with bundled rebates
than with independent pricing, at least in the short run.”114
However, from a long-
run or an efficiency standpoint, it would depend on the market’s characteristic,
demand and costs curves. As a general idea, economists do not find price
discrimination presumably anti-competitive since it may have positive effect on
both consumer and producer welfare.
Nevertheless, Article 82 (2) (c) EC clearly considers abusive “applying
dissimilar conditions to equivalent transactions with other trading parties, thereby
placing them at a competitive disadvantage”. Discriminating consumers,
therefore, could be against competition if goods or services have different prices
that do not directly correspond to the differences in the cost of supplying them.115
Yet case law has not provided a clear definition of what constitutes a “competitive
113
Carlton, D. and Perloff, J. Id. note 28 p 303.
114
115

disadvantage,” especially because differences in prices may be a result of several
reasons rather than being discriminatory alone.
In United Brands v. Commission,116
the European Court considered
discriminatory the difference in price charged between wholesaler banana ripeners
from different Member States. The Court declared that United Brands applied
artificial price differences, which means that these practices had no economic
justification. In British Airways v. Commission117
the Court upheld the
Commission decision that BA was unlawfully discriminating between travel
agents. On the other hand, in Michelin II118
, the CFI asserted that loyalty-inducing
rebates have as the main anticompetitive effect the foreclosure that it may cause
on market, “irrespective of whether or not the rebate system is discriminatory.”119
Finally, discriminatory practices have also been condemned unlawful for
their capacity of restricting competition among retailers. However, the
Commission has never considered that suppliers would be worse off if restricted
downstream competition reduces sales upstream. In addition, rebates schemes that
are awarded independently of “the size of the retailer and in some sense
proportionate to its sales efforts tends to increase, not reduce, competition among
retailers, eliminating possible gaps that a small retailer would possibly have with
respect to a larger one.”120
C. Loyalty Discounts’ Outcomes
This section presents an analysis of the main outcomes of loyalty
discounts. First, the foreclosure effect will be examined under both economic and
legal perspectives, to attempt to expose how it harms competition and how Courts
tend to view such effects. Second, how loyalty discounts may also have efficiency
116
Case 27/76 [1978] ECR 207, [1978] 1 CMLR 429.
117
Id. note 2.
118
Id. note 3.
119
Id. para 65.
120
Heimler, A Id. note 41 p 6.

benefits and enhance competition, followed by the possible justifications for a
firm to adopt such measure rather than exclude competitor.
1. Foreclosure Effect
The foreclosure effect of loyalty-inducing pricing practices is caused by
the ability of firms to apply exclusionary structures that drive competitors out of
market or that block new entrants. This effect is more evident when the discounter
is a dominant firm. The Commission in its “Guidelines on Vertical Restraints”
stated that “the stronger its dominance, the higher the risk of foreclosure of other
competitors.”121
Competition on prices is a desirable feature of markets and
excluding less efficient competitors could be a pro-competitive consequence of
pricing practices. However, the concerns of the foreclosure effect relate mainly to
equally efficient firms that cannot cope with such structure. Moreover, discounts
that have a loyalty-enhancing effect can be exclusionary because consumers face
a significant switching cost. Competitors may indeed not be able to compensate
the consumers that by switching their purchases would loose a significant
discount. To illustrate the exclusionary effect of loyalty discounts, please see the
example below122
:
Consider a situation where a dominant firm charges £100 for its products
and offers a 5% discount on all sales if the quantity exceeds a target level of 1.000
units. Suppose the customer has already bought 999 units and is considering the
acquisition of one additional unit. If the customer buys the unit from the same
supplier, it will benefit from the retroactive discount that is granted for all the
units the customer purchased. Therefore, the 5% discount will not only be applied
on the marginal unit, but also on the whole purchase, resulting in a £50 discount,
as it is shown in the graph below (2.1).
121
Id. note 93 para 148
122
This example and the relating graphs are based on the lecture given by Dr. Jorge Padilla,
“Rebates: Efficiency v. Foreclosure – An economic commentary”, 26 April 2005 at University
College London – LECG European Competition Policy.

2.1
Furthermore, until reaching the target volume, 1.000 units, competitors
face no competitive constraint. However, if a competitor wants to challenge the
additional units it will have to discount its price by £50, or 50 percent. This means
that the competitor may have to offer prices below cost or even near to negative
price to compensate the consumer to switch its supplier. This illustration also
shows why loyalty discounts may be similar to predatory pricing or to bundling.
Under this same example, consider that the cost of producing the good is £60.
Hence, the price after the rebate will be below cost. See the following graph (2.2):
(2.2)
Therefore, if a rival wants to compete for the contested sales it will have to
charge the product below its cost. Under the firm’s perspective, this type of
predation tends to be more attractive, since the losses are focused only at the
marginal units and not all prices. Furthermore, the graph below (2.3) shows why

conditioning the discount to the purchase of two different goods may have a
foreclosure effect that some bundling sales can trigger. Consider, however, that
instead of granting the discount to the achievement of a volume target of one
product, the firm conditioned the rebate to the purchase of a second product. In
addition, the firm has a considerable market power for the first product (assured
sales), but faces competition for the bundled product (contested sales).
(2.3)
Thus, a single-product rival of the contested product will have to offer a
£50 discount to compensate consumers for their losses. The main concern is that
this pricing scheme can have an exclusionary effect even for equally efficient
competitors. Finally, bundle discounts likewise bundling or tie-in sales may be an
effective strategy for firms that are willing to extend their market power by either
harming competitor or increasing the barriers for new entry.123
The foreclosure effect is considered by most scholars to be the main
anticompetitive effect of loyalty discounts. However, determining whether a
pricing structure actually drives competitors out of the market or creates barriers
to new entry is a fact-specific matter. Thus, “account must be taken of the
conditions under which competitive forces operate on the market, including the
number and the size of producers, the degree of market saturation and maturity,
the level of trade involved, customer brand loyalty, the nature of the good or
123
See Gans,J. and King, S. “Potential Anticompetitive Effects of Bundling” University of
Melbourne (2004)

service, and trends in product sales.”124
However, two features of loyalty rebates
have received greater attention from the case–law and commentators: (1) the
duration of the reference period, and (2) the constraint caused by the switching
cost.
1.1. The Length of the Reference Period
It is argued that the length of the reference period is irrelevant to assess the
foreclosure effect and that “the only relevant variables for assessing switching
costs in retroactive rebates schemes are the threshold level at which the retroactive
rebate applies and the rebate percentage.”125
However, the case law has tried to
establish a general rule regarding the length of the reference period and most
scholars consider that “generally, the longer it is, the greater the cumulative effect
of the discount will be in absolute terms.”126
In Coca-Cola v. San Pelligrino127
, for example, the Commission
considered that rebates awarded over a period of not more than three months
would not harm competition.128
In the first Michelin129
judgement, the Court
defined that “any system under which discounts are granted according to the
quantities sold during a relatively long reference period has the inherent effect, at
the end of that period, of increasing pressure on the buyer to reach the purchase
figure needed to obtain the discount or to avoid suffering the expected loss for the
entire period”130
Nonetheless, establishing a rule regarding the length of the
reference period could not go beyond a general concept that a longer period tends
to cause a greater exclusion.131
In other words, any per se rule should be replaced
with a rule of reason based on an economic analysis of each market context.
124
Spinks, S. “Exclusive Dealing, Discrimination, and Discounts under EC Competition Law” 67
Antitrust Law Journal 641 (2000) p 12.
125
Maier-Rigaud, F. “Switching Costs in Retroactive Rebates – What’s time got to do with it?” Max
Planck Institute for Research on Collective Goods (2005) p 1.
126
Lang, J. Id. note 77 p 19.
127
Commission of the European Communities, XIXth Report on Competition Policy, 1989,
128
Id. para 50.
129
Id. note 23.
130
Id. para 81.
131

Further, it is not only the duration of period which should be noted, but
also how it is presented in the market. For instance, if applying such a rebate
scheme is a common practice in a specific market, the gap between the beginning
and ending of each of the reference periods may be an important issue for a new
entrant. This is because to achieve a “minimum efficient scale by a new entrant
could be delayed if the beginning and ending of reference periods were
unsynchronised across buyers, leaving only a small portion of the market ‘up for
grabs’ at any point in time.”132
Even though the duration remains relevant, “the
focus is now on the practical ability of customers to terminate and switch rather
than on the formal contractual ability to do so.”133
1.2. The Role of Switching Cost
Account must also be taken of the role played by switching in the
foreclosure of the market. In the above extract of the first Michelin case, the
Europe Court refers to the “increasing pressure” the buyers face at the ending of
the reference period. On one hand, Luc Gyselen argued that this pressure is due to
the customers’ uncertainty of whether or not they will be able to reach the target
and receive the discount. On the other had, John Kallaugher and Brian Sher do not
discharge the importance of uncertainty in assessing loyalty discounts, but
Kallaugher claims that the major issue capable to cause foreclosure on market is
pressure triggered by switching costs.
Switching cost, therefore, is the amount a customer would lose by not
receiving a rebate when changing its suppliers. Consequently, if a competitor is
willing to attract this customer, it would have at least to deduce this amount from
its price. In other words, “as the loyalty rebate makes existing customers less
price-sensitive, then the competitiveness of the market is reduced and so prices to
both new and old customers can be higher than without switching costs.”134
Nevertheless, the sole existence of switching costs does not necessary foreclosure
the market access, but, according to Kallaugher and Sher, other markets’
132
Id. note 20 Executive Summary p 9.
133
Kallaugher, J. and Sher, B. Id. note 7 p 17.
134
OFT and DTI Guideline 655 Switching Cost Economic Discussion Paper 5 – Part One:
Economic Models and Policy Implication (2003) para. 5.2.

characteristics should be taken into account:135
(1) the number and the size of the
customers participating in the programme and the proportion of their sales that is
shifted to the dominant firm as a result of the rebate scheme; (2) the costs of the
potential entrants and if they are able to offer a competing and profitable price;
and (3) the duration of the customer commitments.
2. Efficiencies’ Benefits
The case law shows that if some pricing structure is “based on
economically justified consideration”,136
or has “countervailing economic
advantage”,137
or even a “business justification”,138
such a practice may be
considered lawful even where an exclusionary effect is found. Moreover, the EC
Merger Regulation clearly declares that the likely efficiency caused by a
concentration could counteract the effects on competition and the potential harms
to consumers. However, recent cases under both European and American
jurisprudence have failed to excuse a rebate scheme for its efficiencies’ benefits.
In both the Michelin II and British Airways cases, “the Court prohibited rebate
schemes even where they led to lower prices and were therefore – presumably – to
the benefit of consumers (and thus were not exploitative).”139
In addition, there
are a number of pricing practices considered unlawful under Article 82 EC that
could have a business or economic justification. Market conditions could force
undertakings to adopt different strategies to solely stay or enter a competitive
market, rather than to disguise an exclusionary policy.
In United Brands v. Commission140
, the ECJ emphasised that a dominant
firm is entitled to protect its own commercial interests, including responding to
competitive offers on the market in order to maintain its customers. Another
general principle can be deduced from Compagnie Maritime Belge Transports SA
135
Kallaugher, J. and Sher, B. Id. note 7 footnote 88.
136
Id.note 2 para 271.
137
Id. note 3 para 74.
138
Id. note 5 at 164.
139
Waelbroeck, D. “Michelin II: A Per Se Rule Against Rebates By Dominants Companies?”
2005, Journal of Competition Law and Economics, Oxford University Press, p 161.
140

v. Commission141
where the ECJ stated that firms can meet or undercut
competitor’s prices, provided that there is no predatory pricing or exclusionary
intention. Therefore, a clearer analysis of which benefits a loyalty discount may
cause and what are the firm’s justifications rather than not exclude competitor,
would be helpful for a more effective rule of reason application.
In general economic terms, low prices generally lead to an increase in
consumption. Therefore, consumers are benefited from the necessity of firms to
enhance themselves in order to provide a better service or an attractive product;
and firms are benefited from an increase in their revenue and possibly a decrease
in their costs. The Commission and EC courts have considered most of quantity
rebates as a lawful practice. This presumption of legality is probably based on the
fact that these kinds of discounts do not carry a discriminatory intent and mainly
reflect a cost saving of the producer. Accordingly, if a firm offers discounts
disregarding the consumer’s capacity of consumption but solely the amount
purchased and consequently has an economic justification of saving production,
the practice is considered pro-competitive.
Therefore, John Temple Lang and Robert O’Donoghue 142
have provided a
list of the principal questions that should be addressed in order to justify pricing
practices that may be contrary to Article 82 EC: (1) whether the discount is solely
volume-based or the firm have achieved an economies of scale; (2) whether the
price reduction was granted in return for service rendered by the supplier; (3)
whether the firm is offering discounts in response to a competitor’s prices; and (4)
whether the discount is a means to promote a new product and new market.
Firstly, according the above statement, economies of scale can indeed lead to an
objective economic justification. Therefore, if the firm can prove that by
achieving a higher volume of sales its costs have decreased, it would only be
passing on “that reduction to the customer in the form of a more favourable
tariff.”143
141
Case T24/93 R etc [1996] ECR II-1201, [1997] 4 CMLR 273; para 139.
142
143
Id. note 3 para 58.

Secondly, a firm may need to offer some benefits to stimulate retailers to
promote its products, since “an upstream firm cannot force by contract its retailer
to enthusiastically promote its products and offer good advice or other
complementary services to customers.”144
Hence, a firm would only make a
significant investment “if the buyer commits to buying all its requirements from
the dominant company for long enough to make the investment profitable.”145
Thirdly, discounts granted to meet a competitor’s prices have been considered
lawful in most of the cases, provided that they were applied as consequence
market’s change in price and with reference to a competing offer.146
Finally,
discounts may be an important form of attract buyer to try new products.
According to the above analysis, third-degree discrimination of price tends
to be efficient and if loyalty discount would become a per se illegality, or rules
would treat it in a too strict way, firms would have to solve its business problems
in a different form. For instance, firm would vertically integrate, which could
cause more exclusionary effect than pricing structures. The main for that is the so-
called agency problem, which “arise because contracts are not costlessly written
and enforced. Agency costs include the costs of structuring, monitoring, and
bonding a set of contracts among agents with conflicting interests, plus the
residual loss incurred because the cost of full enforcement of contracts exceeds
the benefits.”147
Therefore, firms tend to create incentives that not only save the
costs of creating and enforcing a contract, but that are able to converge both
supplier and buyer’s interests. Hence, loyalty discount could be a less costly and
more effective form to achieve such a goal.
144
Spector, D., “Loyalty Rebates and Related Pricing Practices: When Should Competition
Authorities Worry?” LECG (2004) p 327.
145
146
Id. p 14.
147
Fama, E. and Jensen, M. "Agency Problems and Residual Claims" Harvard University Press,
(1998) Journal of Law & Economics Vol. 26 June (1983) p 2.

V. Alternative Treatments
The high complexity of rebate schemes has led to numerous analogies
with similar price structures. Several economic approaches have also sought a
standard rule which could balance a firm’s behaviour on the market and consumer
welfare. Moreover, courts have been facing an increasing pressure to adopt
economics’ concepts in their judgments. On the one hand, economic models are
regarded as too abstract for practical purposes. On the other hand, courts tend to
establish per se rules in order to standardise future judgments. Therefore, much
has been said for loyalty discounts to be treated a under rule of reason.
Conversely, to the per se approach, the rule of reason is based on a balance of the
efficiencies created by a rebate and its anticompetitive effects. The American
antirust law has long applied such concept. However, measuring the possible pro
and anticompetitive could be a difficult task. The information needed to such
analysis may not be easily available or even to predict future effects may not be
economically feasible. Thus, an alternative would be the application of a rule of
reason guided by practical tests that combine essential premises of the undesirable
effects and still leave a margin of analysis of the specific market.
Hence, given the need for a more practical and economic based analysis of
loyalty discounts, several legal tests have been proposed by courts in order to help
the assessment of pricing schemes. The main difficulty is to find a balance
between too tolerant rules that have a welfare cost, and too strict rules that
discourage legitimate competition. Therefore, the following considers some main
legal tests proposed by both European and American courts.

A. European Community Tests
Under European jurisprudence, both Michelin II148
and British Airways149
provided similar tests to assess the possible anticompetitive effects of loyalty
discounts. In the first case, the European Court emphasised the AKZO v.
Commission150
judgment that “prices below average variable costs applied by an
undertaking in a dominant position are regarded as abusive in themselves because
the only interest which the undertaking may have in applying such prices is that of
eliminating competitors (paragraph 71) and that prices below average total costs
but above average variable costs are abusive if they are determined as part of a
plan for eliminating a competitor (paragraph 72).”151
Further, the Court stressed
that quantities rebates that do not correspond to economies of scale were not
economically justified and should exclusionary.
In British Airways, the CFI established a two-step test to assess the
possible illegality of BA’s rebates: (1) whether the rebate scheme has a fidelity-
building effect; and (2) if so, whether it was based on an economically justified
consideration.152
Regarding the fidelity-building effect, the Court emphasised that
because of the progressive nature of the rebates and the “very noticeable effect at
the margin”153
, the rebates were capable of rising exponentially from one
reference period to another. Further, the Court stated that even a slight decrease in
sales of BA tickets compared with the previous reference period led to a strong
penalty in the rates of performance rewards. Regarding the economic
justification, the Court concluded that the additional remuneration of the agents
had no objective relation to the sale of additional tickets. In other words, the Court
noted that the application of a higher rate of commission - on all BA tickets sold
during the reference period and not only on those sold after the achievement of the
target - was price disproportionate to the productivity gain obtained.
148
Id. note 3.
149
Id. note 2.
150
Id. note 79.
151
Id. para 242.
152
Id. note 2 para. 271.
153
Id. para 272.

Although both judgments relied on a possible economic justification, the
Commission and the Court failed to provide an economic scrutiny of the rebate
schemes’ implications. By requiring that rebates would only be considered lawful
if they reflect cost saving, "the most that economic theory suggests should be
meant by this is that incremental prices should be above incremental costs.
Provided discount schemes or rebates do not lead to incremental prices below
incremental cost of supply, they should be considered cost justified. A key point
here is that, for firms with low marginal costs, even big price rebates can be ‘cost-
justified’ in the only sense that really matters from the point of view of economic
efficiency, since they still tend to exceed the marginal costs of supply".154
B. US Jurisprudence Tests
The LePage’s case has provided an important framework for considering
loyalty rebates specially for considering 3M’s schemes illegal in the absence of
showing of below-cost pricing. Based on the concept that loyalty rebates are
exclusionary disregarding cost analysis, the Court rejected 3M’s statement that
after the Brooke Group Ltd. V. Brown & Williamson Tobacco Corp.155
pricing
structures above-cost are a per se legality. Therefore, “the legal strategy of the
defendant, 3M, was to compare price to cost and use the case law of predation.
3M advocated the use of the Ortho test, in its appellate filings.”156
Under the
Ortho Diagnostics Sys., v. Abbott Lab157
case the “plaintiff would be required to
show either that the monopolist prices below its average variable cost, or that the
plaintiff was as efficient a producer of the competitive products as the monopolist,
but the rebate scheme made it unprofitable for the plaintiff to continue to
produce.”158
Before the LePage’s case, the Ortho test was considered to be the
accurate evaluation of the possible anticompetitive effects of loyalty rebates.
154
Bishop, S. and Walker, M. Economics of EC Competition law Sweet & Naxwell (1999) pp.
201–202.
155
Id. note 52.
156
157
Id. note 4.
158
Warren, J. Id. note 85 p 1628.

Under the analysis applied in LePage’s, the US Court claimed that rebates
schemes will be scrutinised under a two-step test: (1) whether the monopolist has
engaged in exclusionary or predatory conduct (with no consideration given to
level of pricing), and (2) if it does, whether the monopolist has a valid business
justification (apart from a desire to enhance its short-term profits).159
The Court
clearly refused to apply the Brooke Group’s test, in which pricing above cost is
generally considered legal and, therefore, did not apply any economic analysis of
pricing issues. Moreover, 3M was considered to apply an exclusionary rebate
scheme, even though LePage’s was not asked to show that it could not compete
with 3M prices.

In Ortho, Abbott Laboratories offered rebates on products used to screen
the blood supply for virus, named blood assays. The defendant provided different
package options and the rebate rate would increase in relation to the assay types a
buyer purchased. Although in any individual product prices have fallen below
cost, the foreclosure resulted mostly because some of the products were Abbott’s
monopoly due to patents. Therefore, the fundamental question raised by the Court
was “whether a firm that enjoys a monopoly on one or more of a group of
complementary products, but which faces competition on others, can price all of
its products above average variable cost and yet still drive an equally efficient
competitor out of the market.”160
Under the Ortho test, a rebate scheme would potentially harm competition
if the monopolist was either (1) charging a price for the competitive product
below average variable cost, or (2) the competitor was as efficient as the
monopolist but still could not afford to match the monopolist’s discount.
According to the first condition, the Court applied to the competitive product the
discount offered for the whole bundle and compared the discounted price to the
defendant’s cost. If the discounted price of the competitive product was below its
cost, the bundle discount would be considered anticompetitive. The second
condition, however, “encounters the problem that Areeda and Hovenkamp’s test
159
Id. note 5 at 152.
160
Id. note 4 at 466-67.

tries to avoid, namely, that it might be difficult for a plaintiff to prove it is as
efficient a producer as the monopolist.”161
The Ortho test has raised some criticism, especially from the economics’
standpoint. Consider, for instance, that a firm applies a bundled rebate for
products A and B. Thus, for this discount to be presumably legal the firm’s
revenue from B less the discounts on A must cover its costs of B. The first point
argued against this test is that it assumes disequilibrium behaviour162
. In other
words, if the rivals of market B cannot meet the firm’s discount this may not be a
consequence of the firm’s pricing, but the rival’s failure to match firm’s costs.
Secondly, even though a bundled discount fails in the Ortho test, it may still raise
the total welfare and consumer welfare.163
161
Warren, J. Id. note 85 p 1628.
162
See Greenlee, P., Reitman and Sibley, D. Id. note 84.
163
The above mentioned example and criticism are based on Patrick Greenlee, David Reitman,
and David S. Sibley Id. note 84.

VI. Conclusion
This dissertation has provided an economic analysis of rebate schemes and
tried to demonstrate that such practices may have pro and anti-competitive
outcomes. Therefore, I believe that there is a great strength in the argument that
loyalty discounts should be treated under rule of reason, rather than be considered
a per se illegality. Lower prices generally provide an increase in sales and may
maximise both consumer and producer welfare. Thus, an antitrust intervention
should recognise that discounting practices might be a legitimate business strategy
for firms overcoming market constraints and, most importantly, ultimately benefit
consumers. Moreover, a rule of reason assessment based on a sound economic
analysis and guided by practical tests would not only help judgments to be more
consistent to the market context, but would also provide a legal safe harbour for
firms when deciding their policies.

Bibliography
Areeda and Turner “Predatory Pricing and Related Practices under Section 2 of
the Sherman Act” 88 Harvard Law Review 697 (1975).
Balto, D., Tom W. and Averitth N. “Anticompetitive Aspects of Market-Share
Discounts and Other Incentives to Exclusive Dealing”, 67 Antitrust Law
Journal 615 (2000).
Bishop, S. and Walker, M. Economics of EC Competition law Sweet & Naxwell
(1999).
Black, J. Dictionary of Economics Oxford University Press (2003).
Carlton, D. and Perloff, J. Modern Industrial Organization Pearson Addison
Wesley, International Edition, Fourth Edition, (2005).
Ehlermann, C and Ratliff, J “Mario Monti’s Legacy for Competition Policy in
Article 82” Competition Policy International (2005).
Eilmansberger, T. “How to Distinguish Good from Bad Competition under Article
82 EC: In Search of Clearer and More Coherent Standards for Anti-
Competitive Abuses.” Common Market Law Review (2005).
Evans, D. and Saliner, M. “Why Do Firms Bundle and Tie? Evidence from
Competitive Markets and Implications for Tying Law.” Yale Journal on
Regulation (2004).
Fama, E. and Jensen, M. "Agency Problems and Residual Claims" Harvard
University Press, (1998) Journal of Law & Economics Vol. 26 June (1983)
http://ssrn.com/abstract=94032
Fisher, F “Innovation and Monopoly Leveraging” Massachusetts Institute of
Technology (1999).
Gans,J. and King, S. “Potential Anticompetitive Effects of Bundling” University
of Melbourne (2004).
Goyder, D.G. EC Competition Law Oxford: Oxford University Press, (2003).
Greenlee, P., Reitman and Sibley, D. “An Antitrust Analysis of Bundle Loyalty
Discounts” Economic Analysis Group (2004).
Gyselen, L. “Rebates: Competition on merits or exclusionary practice?” 8th
EU
Competition Law and Policy Workshop, European University Institute (2003).
Heimler, A “Pricing below cost and loyalty discounts: are they restrictive and if so
when?” (2004). http://ssrn.com/abstract=634723

Jones, A. and Sufrin, B. EC Competition Law Oxford University Press, (2004).
Kamann, H and Bergmann, E. “The Granting of Rebates by Market Dominant
Undertakings under Article 82 of the EC Treaty.” European Competition Law
Review (2005).
Kallaugher, J. and Sher, B. “Rebates Revisited: Anti-Competitive Effects and
Exclusionary Abuse under Article 82” European Competition Law Review
(2004).
Lang, J. T. and O’Donoghue, R. “Defining Legitimate Competition: How to
Clarify Pricing Abuses under Article 82 EC” Fordham International Law
Journal (2002).
Maier-Rigaud, F. “Switching Costs in Retroactive Rebates – What’s time got to
do with it?” Max Planck Institute for Research on Collective Goods (2005).
Mills, D. E. “Market Share Discounts” Department of Economics, University of
Virginia (2004).
Nalebuff, B. “Bundling, Tying, and Portfolio Effects”, DTI Economics Paper No.
1, Yale University (2003).
Pindyck,R. and Rubinfeld, D. Microeconomics Prentice Hall, sixth edition.
Spector, D., “Loyalty Rebates and Related Pricing Practices: When Should
Competition Authorities Worry?” LECG (2004).
Spinks, S. “Exclusive Dealing, Discrimination, and Discounts under EC
Competition Law” 67 Antitrust Law Journal 641 (2000).
Van den Bergh, R. and Camesasca, P. European Competition Law and
Economics – A Comparative Perspective Intersentia (2001).
Vickers, J., “Abuse of Market Power”, speech to European Association for
Research in Industrial Economics, September 2004,
www.oft.gov.uk/NR/rdonlyres/948B9FAF-B83C-49F5-B0FA-
B25214DE6199/0/spe0304.pdf
Waelbroeck, D. “Michelin II: A Per Se Rule Against Rebates By Dominants
Companies?” Journal of Competition Law and Economics, Oxford University
Press (2005).
Warren, J. “LePage’s v. 3M: An Antitrust analysis of Loyalty Rebates” New York
University Law Review (2004).
Whish, R. Competition Law London: LexisNexis Butterworths, Fifth Edition,
(2003).

Table of Guidelines and Reports
OECD “Loyalty and Fidelity Discounts and Rebates” Competition Committee
(2003).
OFT Guideline 414 Assessment of Individual Agreement and Conduct
OFT and DTI Guideline 655 Switching Cost Economic Discussion Paper 5 – Part
One: Economic Models and Policy Implication (2003).
The European Commission’s Notice on the Definition of the Relevant Market for
the Purpose of Community Competition Law explains (OJ [1997] C 372/5, [1998]
4 CMLR 177)
The European Commission’s Guidelines on Vertical Restraints (OJ [2000] C
291/1. [2000] 5 CMLR 398)

ECONOMIC ANALYSIS OF LOYALTY DISCOUNTS AND REBATES AND THE ECONOMIC AND LEGAL ASPECTS OF ALTERNATIVE TREATMENTS

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (14)

Similar to ECONOMIC ANALYSIS OF LOYALTY DISCOUNTS AND REBATES AND THE ECONOMIC AND LEGAL ASPECTS OF ALTERNATIVE TREATMENTS

Similar to ECONOMIC ANALYSIS OF LOYALTY DISCOUNTS AND REBATES AND THE ECONOMIC AND LEGAL ASPECTS OF ALTERNATIVE TREATMENTS (20)

ECONOMIC ANALYSIS OF LOYALTY DISCOUNTS AND REBATES AND THE ECONOMIC AND LEGAL ASPECTS OF ALTERNATIVE TREATMENTS