The Price of Loyalty: Bundled Discounts and Quasi-Exclusive Discount Structures

1. The Price of Loyalty: Bundled Discounts and Quasi-Exclusive Discount Structures Willard K. Tom ABA Antitrust Section Spring Meeting Washington, DC April, 2003 Morgan, Lewis & Bockius LLP

2. Raising Rivals’ Costs Basics

3. Exclusive Dealingto Raise Rivals’ Costs Excluded Competitor Dominant Firm Distributor A Distributor B Distributor C Customers

4. Tying to Raise Rivals’ Costs Excluded Competitor Seller Bundle Good 2 Good 1 Good 2 Buyer

5. Some Exclusive Dealing Stories Require Distribution Entry Barriers Excluded competitor Dominant Firm Entry Barriers Block Use of New Distributors Distributor A Distributor B Distributor C customers

6. Barriers Not Absolute/Raise Cost of Distribution Excluded competitor Dominant Firm More Expensive Distributor D Distributor A Distributor B Distributor C customers

7. Types of Cost-Raising that Might Confer Power Over Price • Raise Cost of Distribution • Deprive Rival of Economies of Scale • Damage Rival’s Brand (goods with network characteristics) • Prevent Ubiquitous Distribution Needed for Advertising, Promotion, or Complements

8. Tying Stories May NotRequire Distribution Entry Barriers Excluded Competitor Seller Bundle Good 2 Good 1 Good 2 Buyer

9. Exclusive Dealing and Tying Through Pricing Structures

10. Loyalty Discounts to Raise Rivals’ Costs • First six units: $115 • After seven units: $108, starting from first unit

11. Loyalty Discounts to Raise Rivals’ Costs, cont’d $115 $108 $66 6 7 8

12. Bundled Discounts: LePage’s v. 3M A B C D E F A Buyer

13. What En Banc Decision Settles • Plaintiff in bundled discount case need not show that monopolist priced below cost. • Plaintiff need not show that the excluded competitor was equally efficient.

14. What En Banc DecisionDoesn’t Settle • If it is lawful to beat LePage’s price by very low but above-cost pricing, why should economically equivalent conduct be unlawful? • Robinson-Patman 2(c), (d), (e)?

15. What En Banc DecisionDoesn’t Settle, cont’d • Presumably this is at most a presumption. How does one rebut? • What if defendant had showed that the price even with all of the discounts allocated to one product was above cost? • Consumers better off allowing conduct: • Monopolist more efficient. • Barriers to re-entry or new entry low. • Should intention not to kill product be relevant?

16. What En Banc DecisionDoesn’t Settle, cont’d • What constitutes a procompetitive justification? • Transaction cost efficiencies in bundling rather than having a separate discount program for 20,000 products? • Is lowering own cost a justification for raising a rival’s?

17. JURY

18. The Price of Loyalty: Bundled Discounts and Quasi-Exclusive Discount Structures Willard K. Tom ABA Antitrust Section Spring Meeting Washington, DC April, 2003 Morgan, Lewis & Bockius LLP