Rebates and other pricing practices

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Rebates and other pricing practices

• Justin Coombs

27 June 2008
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Pricing practices under Article 82

• Is the approach to rebates consistent with other
  pricing practices?
• What does DG Comp staff discussion paper say
  about
• Predation
• Rebates
• Mixed bundling

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Predation

• Modified AKZO and Tetra Pak II test
• Uses Average Avoidable Cost (AAC) in place of
  Average Variable Cost

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Predation

• Higher test for liberalised sectors (e.g.
  utilities)
• Long run incremental cost (LRIC) used in place of
  AAC
• LRIC is higher than AAC so tougher test to pass
• All presumptions are rebutable
• P lt AAC but no anti-competitive effect
• P gt ATC but significant scale economies

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Rebates

• Rebates on incremental sales
• If you buy more than x, you receive a discount on
  purchases above x
• Retroactive rebates
• If you buy more than x, you receive a discount on
  all (past) purchases

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Rebates
Price
Incremental rebates
P1
P2
Quantity
x
Price
Retroactive rebates
P1
P2
Pe
Quantity
x
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Rebates

• Conditional rebate on incremental sales
• Is price of incremental sales predatory?
• Use P lt ATC because rebates require no profit
  sacrifice incremental price can be left below
  cost over long run.
• Conditional rebates on all sales
• Is x close to normal sales to relevant customer?
• What is the minimum efficient scale for a new
  entrant?
• What is the effective price for this quantity
  around x?
• If this price lt ATC anti-competitive effect
  presumed

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Rebates
Actual purchases
Price
P1
P2
Quantity
x
A
9
Rebates
Actual purchases
Price
P1
P2
Competitor
Incumbent
Quantity
x
A
Y
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Rebates
Actual purchases
Price
P1
P2
Competitor
Incumbent
Quantity
A
Y
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Rebates
Actual purchases
Price
P1
P3
Competitor
Incumbent
Quantity
A
Y
12
Rebates
Actual purchases
Price
P1
P3
Quantity
A
Y
13
Rebates
Actual purchases
Price
P1
P3
Quantity
A
Y
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Rebates

• Conditional rebate on incremental sales
• Is price of incremental sales predatory?
• Conditional rebates on all sales
• Is x close to normal sales to relevant customer?
• What is the minimum efficient scale for a new
  entrant?
• What is the effective price for this quantity
  around x?
• If this price lt ATC anti-competitive effect
  presumed

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Mixed bundling

• Tying
• If you buy A you must also buy B (but you can
  still buy B separately)
• Pure bundling
• Cannot buy A or B separately, only as a bundle
• Mixed bundling
• Can buy either A or B separately, or buy bundle
  of A and B
• But bundle is cheaper than sum of separate prices

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Mixed bundling

• Four-part test
• (1) Dominance
• (2) A and B are distinct products
• (3) Foreclosure effect presumed if
• Price of the incremental product lt long run
  incremental cost (LRIC)
• (4) Efficiencies

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Tests for anti-competitive pricing
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Observations

• Rebates are a common pricing practice in
  competitive markets
• Form of price competition
• There should be no presumption that they are
  designed to foreclose markets
• Test for retroactive rebates is very complex
• Requires a dominant firm to assess the likely
  sales/MES of a competitor when setting its own
  price
• Different price test for different practices
• In all cases the relevant question should be the
  same would an efficient competitor survive
  charging this price?

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Rebates and other pricing practices

• Justin Coombs
• jcoombs_at_lecg.com
• www.lecgcp.com

27 June 2008