Volume 14, Issue 1
Winter 2015
Conditional Pricing: The Evolving Frontier of
Antitrust Enforcement
Dr. Su Sun
Conditional pricing includes two types of pricing
discounts: (1) discounts or rebates offered on a
bundle of multiple products but not available on
separate purchases of products in the bundle; and
(2) loyalty discounts or rebates given to single
product purchases that exceed a specified share
or volume. Conditional pricing is a common
business practice, but when used by a dominant
firm there may be antitrust concerns. The use of
conditional pricing is controversial and different
U.S. courts have used different criteria in judging
its legality. Last year the Federal Trade
Commission and the Antitrust Division of the
Department of Justice held a one-day public
workshop to explore the economics and legal
1
policy implications of conditional pricing.
There is no consensus in analyzing bundled or
loyalty discounts in U.S. case law. In LePage’s,
2
Inc. v. 3M (2003), 3M had a dominant share in
the market for transparent tapes, but private label
products were emerging as a competitive threat.
3M responded by making its own private label
tapes. Since 3M also made other office products,
including its branded Scotch tapes, it offered
discounts to stores that purchased bundles that
included its private label tape. LePage’s could not
match that strategy due to its limited product
variety. The Third Circuit found that 3M’s bundled
pricing strategy was to exclude LePage’s from the
transparent tape market by leveraging 3M’s
monopoly power in other products. The Third
Circuit ruled against 3M on the basis of exclusion,
not predation.
This exclusion-based standard adopted by the
Third Circuit was much criticized. In 2007, the
Antitrust Modernization Commission (AMC)
suggested a different test that focused more on
3
predation than exclusion. The AMC’s test
required the plaintiff to show three things. First, the
defendant sold the competitive product below its
incremental cost after all discounts and rebates
attributable to the bundle of products were
allocated to the competitive product. Second, the
defendant likely would recoup the losses from the
below-cost pricing. Third, the bundled discounts
would likely harm competition.
The AMC’s discount attribution test was adopted in
the Ninth Circuit’s decision in Cascade Health
4
Solutions v. PeaceHealth (2007). McKenzie and
PeaceHealth were the only providers of hospital
care in Lane County, Oregon. Both offered primary
and secondary care, but only PeaceHealth also
offered tertiary care. McKenzie claimed that it was
more efficient in providing primary and secondary
care, but it could not compete because
PeaceHealth offered discounts on tertiary care to
insurers only if they made PeaceHealth their sole
preferred provider for all three services. The Ninth
Circuit adopted the first prong of the AMC’s three
pronged test to allocate total discounts to the
competitive
product.
The
Ninth
Circuit’s
requirement of a showing of below cost pricing in
this case is consistent with the Supreme Court’s
decision in Brooke Group v. Brown & Williamson
5
Tobacco Corp. (1993) that a plaintiff must show
that a rival’s discounted price falls below an
appropriate measure of its costs.
Loyalty discounts are given to single product
purchasers that satisfy specified share or volume
requirements. In ZF Meritor, LCC v. Eaton Corp.
6
Eaton had long term agreements
(2012),
involving loyalty discounts with all four direct
customers in the heavy duty “Class 8” truck
transmissions
market.
The
Third
Circuit
considered these arrangements to be exclusive
dealing and thus exclusionary. Eaton argued that it
priced its products above cost. The Third Circuit
rejected a price-cost test proposed by Eaton. In
contrast, in Eisai Inc. v. Sanofi Aventis U.S. LLC
7
(2014), the district court found the practices that
the plaintiff alleged were exclusionary all came
down to price, and a price-cost test was
appropriate. The court granted summary judgment
for Sanofi.
4
1
See https://www.ftc.gov/news-events/eventscalendar/2014/06/conditional-pricing-practices-economicanalysis-legal-policy.
2
LePage’s, Inc. v. 3M Co., 324 F.3d 141 (3d Cir. 2003).
3
Antitrust Modernization Commission Report and
Recommendations, April 2007, at 94-100.
American Bar Association
Cascade Health Solutions v. Peace Health, 515 F.3d 883 (9th
Cir. 2008).
5
Brooke Group Ltd. v. Brown & Williamson Tobacco Corp, 509
U.S. 209 (1993).
6
ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3d Cir. 2012).
7
Eisai Inc. v. Sanofi-Aventis U.S., LLC, No. 08-4168 (MLC),
2014 U.S. Dist. LEXIS 46791 (D.N.J., Mar. 28, 2014).
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Volume 14, Issue 1
U.S. antitrust authorities are not the only ones
scrutinizing conditional pricing. For example, last
year the EU General Court affirmed the European
Commission’s (EC) decision against Intel’s
practice of offering rebates to PC manufacturers
and to a PC retailer that were conditional on
buying all or almost all of their microprocessors
8
from Intel. While the EC performed a rule of
reason analysis of Intel’s pricing practice, the
General Court went further to find loyalty rebates
by a dominant firm, like Intel, a per se violation.
In another earlier case, Virgin Atlantic complained
that British Airways used anticompetitive pricing
strategy by giving bonus commissions to travel
agencies and discounts to corporate customers
based on the total dollar amount they booked with
British Airways. In this case, the U.S. and EU
reached different conclusions on the same loyalty
discount issues: while the U.S. Second Circuit
confirmed the district court’s decision to grant
9
summary judgment for British Airways, the
European Court of Justice confirmed the Court of
First Instance’s earlier ruling supporting the
European Commission’s decision that the
performance reward schemes constitute an abuse
10
of dominance.
Chinese antitrust authorities are also dealing with
conditional pricing issues. One of the three
Chinese
antitrust
agencies,
the
State
Administration of Industry and Commerce (SAIC),
has been investigating Tetra Pak’s bundled pricing
of its packaging machines, packaging materials,
11
and service. Tetra Pak’s response is that “our
customers are free to choose between our
offerings of packaging machines, packaging
material, technical service and processing
solutions even if, notwithstanding the development
of strong competition, many chose to buy more
than one product from us, most likely because
they consider our offering to be the best and most
12
competitive solution.” Another Chinese antitrust
Winter 2015
agency in charge of antitrust review of mergers
and acquisitions, the Ministry of Commerce
(MOFCOM), has imposed conditions on a recent
merger between Merck KGaA and AZ Electronic
Materials, prohibiting post-merger cross bundling
13
of the merging parties’ products.
In another active antitrust jurisdiction, the Korean
Fair Trade Commission (KFTC) fined Qualcomm
in 2009 for both bundled pricing and loyalty
rebates. More specifically, the KFTC determined
that in licensing its CDMA technology to mobile
handset makers, Qualcomm charged lower royalty
rates if they also bought Qualcomm’s modem
chips. KFTC also considered Qualcomm’s offer of
rebates to mobile handset makers based on
meeting a big portion of their total purchases an
14
abuse of market dominance.
Economists recognize that the use of conditional
pricing as a competitive strategy often results in
lower prices for customers, especially when firms
adopting that pricing strategy do not possess
market power. Conditional pricing can also be
used to address incentive issues between
15
On the
manufacturers and their distributors.
other hand, economists also recognize that in
some circumstances when firms have market
power, such pricing may exclude competitors,
even when competitors are more efficient, and
may strengthen a firm’s market dominance, or
extend market power from one market to
16
another.
There appears to be no bright-line test that would
distinguish between competitive conditional pricing
and anticompetitive discounts. Currently the most
frequently cited test is the price-cost test. The
main benefits of the price-cost test include the
underlying principle that only discounts that do not
allow equally efficient rivals to compete may be
considered a violation of the antitrust law.
However, skeptics say price is not the only
dimension for competition, especially in a
8
See the judgment in Intel v Commission (T-286/09), June 12,
2014, available at
http://curia.europa.eu/juris/document/document.jsf?text=&docid
=153543&pageIndex=0&doclang=EN&mode=req&dir=&occ=fir
st&part=1&cid=315037.
9
Virgin Atlantic v. British Airways, 257 F.3d 256 (2d Cir. 2001).
10
British Airways v. Commission, case C-95/04 (2007).
11
See, for example, a July 31, 2013 news report on SAIC’s
Director General Ren Airong’s discussion about the progress of
the case, at http://www.chinanews.com/gn/2013/0731/5108197.shtml. The investigation has not concluded to date.
12
See “Tetra Pak statement on the on-going SAIC investigation
in China” at http://www.tetrapak.com/about-tetrapak/tetrapakstatementontheon-goingsaicinvestigationinchina.
American Bar Association
13
See MOFCOM’s Public Notice No. 30, 2014, at
http://fldj.mofcom.gov.cn/article/ztxx/201404/20140400569060.
shtml.
14
See press release “Qualcomm’s Abuse of Market
Dominance,” Korea Fair Trade Commission, July 23, 2009,
available at http://eng.ftc.go.kr/bbs.do.
15
See Bruce H. Kobayashi, “The Economics of Loyalty
Discounts and Antitrust Law in the United States,” Competition
Policy International, Vol. 1, No. 2, 2005.
16
See, for examples, Michael D. Whinston, Tying, Foreclosure,
and Exclusion, 80 American Economic Review, 837-59 (1990),
and Barry Nalebuff, Bundling as an Entry Barrier, 119 Quarterly
Journal of Economics, 159-87 (2004).
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Volume 14, Issue 1
Winter 2015
differentiated product market. Firms may also
compete through marketing and quality. Some
critics of this test argue that even less efficient
competitors help lower prices for consumers, thus
17
exclusion of them may be anticompetitive.
From the practical perspective, because the pricecost test is relatively straightforward, it is easier for
businesses to comply with and for courts to rely on
in adjudicating such disputes. Still, application of
such a test may be difficult. For bundled product
discounts, a large number of products may be
included in the bundle, the pricing schemes of
different bundles may be very complex, and rivals
may form their own bundles in response to a
dominant firm’s bundling. For single product loyalty
discounts, it is often difficult to determine the level
of purchases the customer would have to buy from
the defendant, i.e., its incontestable demand.
In general, there is a need to balance all these
considerations in finding a proper test for
analyzing conditional pricing. Such a test needs to
be based on sound economics, and should also be
clear and administrable.
About the Author
Dr. Su Sun is a Vice President at
Economists Incorporated and has
worked
on
cases
involving
conditional pricing.
17
For a broad spectrum of views on the debate, see
presentations at the FTC/DOJ workshop, supra note 1.
American Bar Association
5