1. Economics RBB 26 JANUARY 2007SIMON BISHOP THE LAW AND ECONOMICS OF LOYALTY REBATES CENTRE FOR COMPETITION LAW AND POLICY, OXFORD UNIVERSITY

2. SIMON BISHOP Economics RBB 2 THE LAW AND ECONOMICS OF LOYATLY REBATES 26 JANUARY 2007 The law as it currently stands The way forward: some (personal) proposals It’s about more than the last unit Start to acknowledge the elephant in the room Be positive Article 82 Discussion Paper: effects-based or status quo? OVERVIEW

3. SIMON BISHOP Economics RBB 3 THE LAW AND ECONOMICS OF LOYATLY REBATES 26 JANUARY 2007 REVIEW OF CURRENT APPROACH Two step approach 1. Is the firm dominant? Define the relevant market Calculate market shares Other factors? 2. Assessment (sic) of conduct Focus on legal precedents Current approach results effectively in a per se prohibition on certain commercial practices by firms held to be dominant

4. SIMON BISHOP Economics RBB 4 THE LAW AND ECONOMICS OF LOYATLY REBATES 26 JANUARY 2007 WHAT’S WRONG WITH LOYALTY REBATES? Customer’s Expenditure A X

5. SIMON BISHOP Economics RBB 5 THE LAW AND ECONOMICS OF LOYATLY REBATES 26 JANUARY 2007 WHY DO FIRMS OFFER LOYALTY REBATES?

6. SIMON BISHOP Economics RBB 6 THE LAW AND ECONOMICS OF LOYATLY REBATES 26 JANUARY 2007 1.Stop focusing on the last unit 2.Start recognising the elephant in the room 3.Start being positive THREE SUGGESTIONS FOR MOVING FORWARD

7. SIMON BISHOP Economics RBB 7 THE LAW AND ECONOMICS OF LOYATLY REBATES 26 JANUARY 2007 1. IT’S ABOUT MORE THAN THE LAST UNIT (1) Customer’s Expenditure A % of Requirements Threshold X Y Z C B Variable Cost Fidelity Rebate

8. SIMON BISHOP Economics RBB 8 THE LAW AND ECONOMICS OF LOYATLY REBATES 26 JANUARY 2007 Customer’s Expenditure A % of Requirements Target C B 1. IT’S ABOUT MORE THAN THE LAST UNIT (2) Variable cost Fidelity Rebate Captive base X Implied price over contestable sales

9. SIMON BISHOP Economics RBB 9 THE LAW AND ECONOMICS OF LOYATLY REBATES 26 JANUARY 2007 2. THE ELEPHANT IN THE ROOM (1) What do we mean by dominance? Some practical questions: At what market share do you become dominant? How to take account of the cellophane fallacy? How to take into account factors other than market share?

10. SIMON BISHOP Economics RBB 10 THE LAW AND ECONOMICS OF LOYATLY REBATES 26 JANUARY 2007 2. THE ELEPHANT IN THE ROOM (2) In the presence of a dominant firm competition is already “weakened” Any harm to competitors necessarily further weakens competition Harm to competitors can be used as a proxy for harm to consumers What can we infer from a finding of dominance? Current legal “analysis” appears to be as follows:

11. SIMON BISHOP Economics RBB 11 THE LAW AND ECONOMICS OF LOYATLY REBATES 26 JANUARY 2007 INCONSISTENCY WITH MERGER CONTROL? ECJ in Tetra-Laval / Sidel: “the analysis of a ‘conglomerate-type’ concentration is a prospective analysis in which, first, the consideration of a lengthy period of time in the future and, secondly, the leveraging necessary to give rise to a significant impediment to effective competition mean that the chains of cause and effect are dimly discernible, uncertain and difficult to establish. That being so, the quality of the evidence produced by the Commission in order to establish that it is necessary to adopt a decision declaring the concentration incompatible with the common market is particularly important since that evidence must support the Commission’s conclusion that, if such a decision were not adopted, the economic development envisaged by it would be plausible.”

12. SIMON BISHOP Economics RBB 12 THE LAW AND ECONOMICS OF LOYATLY REBATES 26 JANUARY 2007 3. BE POSITIVE Who moves faster?: markets v. the Courts Judge Frank Easterbrook The Limits of Antitrust (1984) ‘Once a practice has been declared unlawful, a business is likely to defend a lawsuit by denying that it engaged in the practice. Rarely will it say: “Yes, we did that, and here’s why it is economically beneficial that we did”. Judges are thus deprived of opportunities to reconsider, with the light of knowledge, what they decided in ignorance. An effects-based (“more economics”) approach requires positive decisions

13. SIMON BISHOP Economics RBB 13 THE LAW AND ECONOMICS OF LOYATLY REBATES 26 JANUARY 2007 A PROPER EFFECTS-BASED SYSTEM A coherent explanation of anticompetitive harm At a minimum, appropriate regard given to actual market evidence In particular, what has happened to competing suppliers’ market shares over time? Do rivals represent equally efficient competitors?

14. SIMON BISHOP Economics RBB 14 THE LAW AND ECONOMICS OF LOYATLY REBATES 26 JANUARY 2007 CRITICISMS OF EFFECTS-BASED SYSTEM “Effects-based system undermines legal certainty” “Good for consultants, bad for the law” “Represents a weakening of competition law” “Competition entails more than consumer welfare”