Transcript slides

Price-cost Tests v. Raising Rivals’ Costs for Loyalty
Programs and its Implication for the Taking of Advantage
of Market Power Provisions
2nd ATE Symposium – Sydney, December 2014
Lilla Csorgo
Disclaimer
The views expressed herein are my own and do not necessarily
reflect those of the New Zealand Commerce Commission.
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Summary
• Both NZCC and ACCC have sought to reform their taking
advantage of market power provisions.
• Both have been criticized for failing to make the case for
reform.
• In particular, failing to point to conduct that otherwise
should be caught.
• Single-product loyalty rebates is such conduct.
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Taking Advantage Provisions
1) There is conduct that involves a firm taking advantage of
its substantial market power; and
2) The conduct was undertaken for the purpose of
eliminating a competitor, substantially damaging a
competitor, or preventing entry.
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Criticisms
1) No consideration of effect of conduct on competition.
2) Taking advantage = counterfactual test, an inadequate
filter:
a) No balancing of any sort
b) Consideration of hypothetical world can be difficult
and unwieldy
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Harper Review
1) “Purpose, effect or likely effect of substantially lessening
competition.”
2) Defence:
a) would be a rational business decision by a
corporation that did not have a substantial degree of
power in the market; and,
b) would be likely to have the effect of advancing the
long-term interests of consumers.
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Counterfactual Test Advocates
1) Allows for casual link between firm’s market power and
the conduct.
2) Effects test causes business uncertainty.
3) No compelling case for change.
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Single Product Loyalty Rebates
• A seller offers a rebate on all purchases, including those
previously purchased, conditional on the percentage of
needs purchased.
o e.g., 10% rebate is offered on all purchases if a buyer
purchases at least 80% of its total annual needs from the
supplier.
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Single Product Loyalty Rebates
1) “Conservative” approach – predation
o Competitive harm arises because an equally efficient
competitor is foreclosed from the contestable portion of the
market because of below cost pricing for that demand.
2) “Liberal” approach – exclusion
o An entrant is foreclosed because the demand it has left
available to it is not large enough to generate positive expected
profits.
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The Debate
“Loyalty discounts and other forms of partial exclusives such
as market-share discounts and shelf space share contracts
are properly analyzed under the exclusive dealing
framework. Price-cost tests in the predatory pricing
tradition are more problematic to administer in practice that
their advocates suggest and, most importantly, simply do
not comport with the underlying economics of exclusive
dealing.” Commissioner Joshua Wright
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The Debate
“I’d say exclusion is anticompetitive only if it is substantial
and could not have been avoided by aggressive pricing.
Omitting the second requirement creates the possibility that
antitrust will be used by a laggard rival to prevent a more
aggressive rival’s consumer-friendly price-competition.” Thom
Lambert (Should There Be a Safe Harbor for Above-Cost Loyalty Discounts?
Why I Believe Wright’s Wrong)
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The Debate
“A price-cost test obviously is not relevant for evaluating
input foreclosure concerns, even where the input is
distribution services. Even if the foreclosure involves
bidding up the price of the input, it can succeed in
permitting the firm to achieve or maintain market power,
despite the fact that the firm does not bid to the point that
its costs exceed its price.” Steve Salop (“Wright is Right and Price-Cost
Safe Harbors are Wrong: The Raising Rivals’ Cost Paradigm, Loyalty Discounts
and Exclusive Dealing”)
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Loyalty Rebates as Predation:
Counterfactual Test
• Price cost test: is the effective price (where all the
discount is attributed to the contestable portion of
demand) below some appropriate measure of cost?
• Counterfactual test: after denying the firm the noncontestable (must-have) portion of its demand, would it
price below cost on its contestable demand?
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Loyalty Rebates as Predation:
Counterfactual Test
• Price cost test: is the effective price (where all the
discount is attributed to the contestable portion of
demand) below some appropriate measure of cost?
• Counterfactual test: after denying the firm the noncontestable (must-have) portion of its demand, would it
price below cost on its contestable demand?
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Loyalty Rebates as Predation:
Counterfactual Test
• Devolves to “traditional” all units predation?
o Need to show recoupment
• But theory of harm is that predating in contestable
portion of demand to protect above cost pricing in noncontestable demand.
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o
Rests on above cost pricing overall
o
No recoupment
Loyalty Rebates as Predation:
(Quasi) Exclusivity and RRC
• Raise the price of a critical input (in this case distribution)
to the point where it is no longer profitable to enter the
market.
o Portion of the market that remains contestable not
sufficiently large given economies of scale.
• Exclusive dealing – may not have an efficiency based
business justification associated with it. Rather procompetitive competition for the market.
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Loyalty Rebates as Predation:
(Quasi) Exclusivity and RRC
• Exclusive dealing: extent of market tied up, length of
contract, geographic distribution of contracts where
economies of density are relevant, reasonable business
justification, etc.
• Counterfactual test (modified): absent market power
would the loyalty rebate be so widespread, be in place
for so long, etc.
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Conclusion
• High probability of false-negatives.
• Both when “conservative” or “liberal” approach to loyalty
rebate taken.
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