The Finnish Competition and Consumer Authority (FCCA) gave a decision, on 11 October 2016, concerning the customer bonus scheme of S Group, a major grocery retailer in Finland. The FCCA determined that the scheme did not restrict competition, and concluded its investigation.
The FCCA decision clarifies which factors are relevant when assessing the effects of customer bonus schemes of dominant companies on effective competition.
Customer Bonus Schemes are an Accepted and Common Means of Competition
The matter concerns the S Bonus scheme where bonuses are paid to a customer based on his purchases from a dominant company or its scheme partners. According to the FCCA’s decision, this kind of customer bonus scheme is to be assessed as a so-called conditional discount. Conditional discounts are a common form of price competition, which companies can employ to promote the demand for their products and to benefit their consumers. The FCCA decision states that conditional discounts granted by a dominant company can also have beneficial effects from the consumers’ perspective. A discount mechanism applied by a dominant company may, however, have a loyalty-enhancing effect which can, in some circumstances, lead to anticompetitive foreclosure effects in the market.
Assessment of the Anticompetitive Foreclosure Effects
The assessment of the impacts of a customer bonus scheme is based on an overall assessment. The application of a scheme may amount to abuse of a dominant position if it prevents the expansion or entry of competitors that are as efficient as the dominant company or hinders the possibility of such competitors to fulfil a part of the purchase needs of individual customers.
According to the FCCA, this so-called as-efficient competitor test is, however, only one of the tools that can be used in assessing the effects of the discounts. Besides the costs, the FCCA also takes into account the following factors in its overall assessment:
- Whether the price reduction is granted gradually or retrospectively. A retrospective discount means that a discount is granted not only on the purchases exceeding a certain discount level but also on all purchases made before the discount level was reached; i.e. the discount is applied retrospectively. Retrospective discounts usually have a loyalty-enhancing effect (so-called suction effect).
- Suction effect and the reference period. The suction effect grows stronger correspondingly the larger the discount and the longer the time period to which the discount is directed (reference period). In the case at hand the FCCA found that a discount scale of 0.5 per cent and a reference period of one month were moderate.
- Contestable share and market share. The assessment takes into account the share of the products or services which the customer can purchase from the dominant company’s competitors (contestable share). In addition, the market share of the dominant company’s position is taken into account. A particularly large market share renders the company a necessary trading partner and enables it to act independently of others.
- Form of the discount. According to the FCCA, a loyalty-enhancing effect of the discounts is emphasised in schemes where the discounts can be used only to purchase products offered by the company that granted the discount or scheme partners. Respectively, the loyalty-enhancing effect is smaller when the benefit is paid in cash or another freely-usable form.
- Effect of the customer bonus scheme on consumers purchasing behaviour. The FCCA took notice also of the factors affecting customers’ choice of the place they shop. According to the FCCA’s decision, the S Bonus scheme had an impact on the choice of primary purchase location, but this impact was minor compared to the impact of, among other things, the location of the shop, product portfolio, familiarity, availability of products, quality of service points and the will to concentrate their purchases. Additionally, the FCCA took notice of the fact that a majority of the customers used different customer bonus cards in parallel.