How Should the Antitrust Laws Analyze Loyalty Discounts and Bundled Rebates?

In the most recent issue of The Antitrust Law Journal, attorney Sean P. Gates describes several possible approaches to these discounts, analyzing the good and the bad for each. His article, Antitrust by Analogy: Developing Rules for Loyalty Rebates and Bundled Discounts, is really quite good.

I identified this article as a must-read in a previous blog post, and finally had the opportunity to review it over the weekend (Note: I had been busy starting a new law firm, so fell behind on my reading). I am glad that I did. Since most of the country is having winter this year, I won’t point out that I read it on my San Diego outdoor patio while enjoying the whiff of freshly-cut lawn, the sight of palm trees, and the distraction of whether to eat a delicious orange right off the tree. I won’t mention it even though after many years in Minnesota—I put in my cold time—I would feel justified in doing so.

Anyway, I recommend the article generally, but more specifically for the following people: (1) antitrust attorneys that are into exclusionary conduct; (2) non-antitrust attorneys with clients that sell in a distribution network (including to retailers); (3) business people involved in pricing and marketing decisions for their company; and (4) antitrust law students that are looking for a good review of various types of exclusionary conduct.

(As an aside, when I was a law student, I would often read at least the summary-of-law sections of law review articles as part of studying for exams: You can only read horn-books for so long without going crazy, the articles were often interesting, and you would review the same material presented from a different perspective or angle, which I think reinforced the concepts. Law school is not about memory, it is about understanding)

The Antitrust Law Journal is great in part because the articles range from practical to historical to economic to academic (and everywhere in between). I would classify this one as practical, but the author is conversant in the economics and academics. That is probably part of why I enjoyed it so much—it matches my own approach and background.

I am not going to delve into it like a New York Review of Books article, but I will give you a few tidbits of what I enjoyed. It is not as thick (and I mean this in a positive way) as some antitrust articles, so you can digest it rather quickly if you have some antitrust background. You should read it yourself.

  • The article starts out by illustrating how antitrust doctrine develops and changes with developments in economic theory. One of several specific examples is the Leegin case overruling the Dr. Miles case from almost one-hundred years before on whether the per se antitrust rule applies to resale-price maintenance. Note: It doesn’t under federal law anymore, but watch out for state antitrust law.
  • The article examines how a court would analyze loyalty discounts (single product discount) and bundled rebates (a discount applied across product lines) by applying existing rules for exclusive dealing, tying, and predatory pricing. The discussion of the various approaches is quite interesting, and a good update on where the law is in these areas. And the citations are thorough enough that I will probably keep the article in mind if I want to pull cites if a particular issue arises.
  • This isn’t really a criticism, but I think it is challenging to do an article that combines loyalty discounts and bundling because there are significant differences in kind that depend upon whether you are dealing with a single market (loyalty discounts) or multiple markets (bundling). But, to be fair, the purpose of the article is to explore those questions. I think the author did a decent job with it, but I probably would have made starker distinctions between the two during the analysis.
  • I was happy to see that the author recognizes that antitrust is not merely an economic exercise, but a blend of “policy, economic, and prudential concerns.” While I appreciate the technical work that economists do in antitrust, sometimes it is easy to forget that the rules are applied by judges (not economists) in a world of imperfect and sometimes costly information and data in markets that are not always well-defined.
  • An important question underlying the entire analysis is how do we want to run our antitrust system. Do we set flexible rule-of-reason standards, whereby each case involves a customized analysis of anticompetitive harm and pro-competitive benefits perfectly suited to the markets and conduct at issue? Or do we set strict rules that both under-deter and over-deter, but mostly get it right, while saving administrative and litigation costs and providing better guidance to companies. (After writing this paragraph, I could almost hear my torts professor from Harvard, Morton Horowitz, in my head describing the difference between rules and standards).

Warning: Spoiler Alert

In the end, the author favors an exclusive dealing approach to loyalty discounts, and a rule-of-reason tying analogy for bundled rebates. But this is an article you can read even though you know the end. I strongly recommend it.

If you want to read more about loyalty discounts, I previously blogged about it here.