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

Raising Rivals’ Costs Basics

Dominant Firm Excluded Competitor Customers Distributor ADistributor BDistributor C Exclusive Dealing to Raise Rivals’ Costs

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

Some Exclusive Dealing Stories Require Distribution Entry Barriers Dominant Firm Excluded competitor customers Distributor ADistributor BDistributor C Entry Barriers Block Use of New Distributors

Barriers Not Absolute/ Raise Cost of Distribution Dominant Firm Excluded competitor customers Distributor ADistributor BDistributor C More Expensive Distributor D

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

Tying Stories May NotRequire Distribution Entry Barriers Tying Stories May Not Require Distribution Entry Barriers Good 1Good 2 Seller Buyer Bundle Excluded Competitor Good 2

Exclusive Dealing and Tying Through Pricing Structures

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

$115 $108 $ Loyalty Discounts to Raise Rivals’ Costs, cont’d

Bundled Discounts: LePage’s v. 3M ACDAEB Buyer F

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

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

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

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

JURY

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