26 JANUARY 2007 SIMON BISHOP

EconomicsRBB

THE LAW AND ECONOMICS OF LOYALTY REBATES

CENTRE FOR COMPETITION LAW AND POLICY, OXFORD UNIVERSITY

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• 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

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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

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WHAT’S WRONG WITH LOYALTY REBATES?

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WHY DO FIRMS OFFER LOYALTY REBATES?

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1. Stop focusing on the last unit

2. Start recognising the elephant in the room

3. Start being positive

THREE SUGGESTIONS FOR MOVING FORWARD

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1. IT’S ABOUT MORE THAN THE LAST UNIT (1)

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Threshold

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Variable Cost

Fidelity Rebate

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1. IT’S ABOUT MORE THAN THE LAST UNIT (2)

Variable cost

Fidelity Rebate

Captive base

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Implied price over contestable sales

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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?

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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:

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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.”

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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

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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?

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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”