Fidelity rebates can reflect efficiencies, or the kind of competitive behaviour that competition policy seeks to promote. However, they can raise concerns when they induce such loyalty that they effectively become a de-facto exclusive dealing arrangement. In these cases, concerns might include whether the scheme allows the firm to raise its rivals’ costs, or apply an effective tax on its rivals’ prices. However, in the same way that exclusive dealing by a dominant firm will not always harm consumers, de facto exclusive dealing will not necessarily harm consumers. Instead, if rivals can compete for exclusivity, then the firms can compete for the entirety of a customer’s business, rather than competing for each unit purchased. Identifying that a fidelity rebate has ‘loyalty inducing’ effects is therefore, on its own, not sufficient to show an abuse of dominance.
To identify a harmful effect, what is required is some asymmetry between the dominant firm and its rivals in their ability to persuade consumers to purchase exclusively that it did not enjoy when competing for units. This can lead to the competition for customers being less intense than the competition for units was. This asymmetry might include a predatory profit sacrifice (which a price cost test can identify). However, it may also include the ability to raise rivals’ costs by denying rivals economies of scale, or access to key input (such as a distribution network). It might also include a willingness and ability to engage in a divide and conquer strategy, or to coordinate with downstream firms to foreclose rivals and increase the retail price of its own product, while splitting the increased profit with the downstream firms so they do not switch to selling a rival’s product. Neither a price cost test nor an as-efficient-competitor test would identify such cases and so neither should be used a screening device or safe-harbour. Agencies should therefore be able to demonstrate not only that the scheme creates exclusive relationships, but also explain, with evidence, why rivals are unable to effectively compete for that exclusivity.
In the EU, the courts have distinguished between unproblematic quantity rebates, and “loyalty” rebates that when used by dominant firms were presumptively illegal in the absence of an objective justification (HoffMann-La Roche, paragraph 89) on the erroneous assumptions that their effect is always harmful. In Post Danmark II the courts identified a third type of rebate where an analysis of the likely effects of such rebates on consumers is required. This was a standardised retroactive quantity rebate which did not entail “an obligation for, or promise by, purchasers to obtain all or a given proportion of their supplies from Post Danmark.” However, equally it was not considered a quantity rebate, since these are linked solely to the volume of purchasing and are granted in respect of each individual order. For these rebates, the court suggested that the as-efficient-competitor test is one tool for assessing whether there is an abuse of a dominance, however, it noted that there are others, and that the as-efficient-competitor test is not a necessary condition for a finding of abusive.
In Intel, the ECJ required the Commission to conduct an ‘effect analysis’ every time that “the undertaking concerned submits, during the administrative procedure, on the basis of supporting evidence, that its conduct was not capable of restricting competition and, in particular, of producing the alleged foreclosure effects.” In practice, the Commission will therefore be required to address those arguments. This shift away from allowing “loyalty” rebates only where objective justification is demonstrated, to instead allowing rebuttal on the grounds that the rebate was not capable of restricting competition, creates a more effects-based approach. It completes the move away from a formalistic approach that, while not a per se prohibition, since it always allowed an objective justification defence, was nevertheless a per se presumption on the capability of the practice to restrict competition. As such, it addresses the problem that there was no opportunity for the defendant to rebut the presumed restrictive effect of a rebate which economic analysis suggests has ambiguous competitive effects. At the same time, placing the burden on the firm to provide evidence to support a rebuttal of the presumed effect allows the Commission to simultaneously guard against the risk of under-enforcement that can arise from an effects-based analysis. As in Post Danmark II, the Intel judgement does not suggest that the Commission should always conduct an as-efficient-competitor test, or prove that prices were negative, each of which would create an under-enforcement risk. Indeed the pro-competitive effects of less efficient rivals were explicitly recognized by the ECJ; “…the presence of a less efficient competitor might contribute to intensifying the competitive pressure on that market and, therefore, to exerting a constraint on the conduct of the dominant undertaking.”
In the US, there is no question that fidelity rebates require an effects-based analysis. Instead, the key area of debate is whether fidelity rebates are a pricing exclusion or an exclusivity exclusion and hence which analytical tests are relevant. For example, in 2012 the US Court of Appeals affirmed a district court finding that Eaton’s conduct in the heavy-duty truck transmission market violated the Sherman and the Clayton Act. The Appeal Court ruled against Eaton despite evidence that its prices had remained above cost. The reason, the Court explained, is that in this case price was not the clearly predominant mechanism of exclusion. The exclusionary effect reflected a range of factors in addition to prices such as Eaton’s position as a necessary trading partner, the long duration of the contract, and the existence of high barriers to entry in the market. The court ruled that these practices as a whole resulted in de facto partial exclusive dealing. The decision was criticised in a dissenting opinion, which said that the plaintiff’s failure to show that price was below cost should have been sufficient to dismiss the case, however, the Supreme Court declined to hear the appeal.
Indeed, the Court of Appeals emphasised that it was not necessary to show that price was below cost when it corrected the District Courts findings on Eisai/Sanofi. In particular, it ruled that exclusivity was the predominant mechanism of exclusion, and not price, and so a price-cost test was not required. This was material to the case, as it was clear that even after rebates were applied, Sanofi did not sell its product Lovenox to hospitals at a price that was below its incremental cost. Nevertheless, the Appeals court agreed that Eisai had failed to show either substantial foreclosure of the market, nor any anti-competitive effect such as increased prices.