A well-attended program on antitrust treatment of "bundled pricing" and "loyalty discounts" at the American Bar Association Antitrust Section Spring Meeting highlighted the confusion generated by the antitrust law implications of such conduct and the disagreements on the proper standards to evaluate them. In this environment, any significant company considering these types of marketing and pricing changes should engage experienced legal counsel in early-stage evaluation and planning.
Just What is "Bundling"?
- All of the lawyers, economists and regulators agreed that the term "bundling" can be applied to almost any conduct where more than one product or ingredient is combined together (e.g., "whitening toothpaste is a bundle because it combines whitening agent and toothpaste, both of which could be purchased separately"), or where two or more products are marketed together and in which market power in one product is used to impair competitors selling a truly second product, as was alleged to be the case in LePages, Inc. v. 3M, 324 F.3d 141 (3d. Cir. 2003), when 3M offered rebates and other discounts across its broad product lines in order to reduce LePage's competitive inroads in sales of transparent tape.
- While "bundling" is distinct from "tying" (in which the second product must be purchased as a condition of obtaining the first product), there are suggestions that if the combination is priced attractively, a consumer is virtually "forced" to buy both, even if there is no condition that the buyer must do so. "Bundling" occurs when the offer is made, and the buyer then makes an "independent" decision to purchase or not to purchase. Tying, on the other hand, involves an express condition that denies the buyer "Product A" unless "Product B" is also purchased. But in antitrust complaints, bundling, tying, and monopolization (or attempted monopolization) are usually conflated to the point where the complaint resembles a non-US "abuse of dominance" claim, and courts (and, a fortiori, juries) have great difficulty in analyzing each claim separately. In short, confusion reigns.
Why Are We Concerned About Bundling and How Do We Measure the Problem?
- There is consensus that the underlying issue is how competition is harmed if a seller acquires or extends monopoly power (over a "non-competitive" product) by using a marketing tactic deliberately aimed to impair the ability of a competitor in the "competitive" product to sell that product on its competitive merits.
- One analytical approach looks at the implicit "discount" in the bundle, as compared to the individual prices available in the market for those identical products when sold separately, and attributes the discount entirely to the competitive product. If that measurement shows that the transaction is above incremental cost (or average variable cost), there should be no competition problem since an equally efficient competitor could do the same, and there will be no harm to consumers.
- Even when the bundler incurs a short-term loss, some believe there must be a further showing (as in a predatory pricing case) that the bundler is (or will be) able to recoup its losses by raising prices after having impaired a competitor. And what if there are other reasons for pricing the bundle that do not harm competition, such as long term cost reduction, enhanced output through new distribution, or gaining business from a set of customers who can be differentiated from customers who buy separate items, etc.? The weight of such factors in the analysis is left open. And if the seller of the "non-competitive" product is really a monopolist, why can't it just raise its price on the "non-competitive" product and gain the same financial benefit? If the seller does not choose to do so, perhaps it is not really a monopolist, and maybe it is really behaving in a procompetitive manner rather than an anticompetitive way.
How Do "Loyalty Discounts" Enter into the Discussion?
- A loyalty discount typically involves a benefit (resulting sometimes from an advance commitment) when a buyer purchases products exclusively or primarily from the seller offering the benefit. There may only be one product (so that no bundle is involved). Or there may be a broad multi-product array in which any product purchase qualifies. Or there may be variations in-between. Although there may not be an agreement that excludes competitors, the additional discount may be lost (or even have to be repaid) if the annual target is not met.
- If the arrangement is called "virtual partial exclusive dealing", as one Court of Appeals has labeled it, it may support a finding of antitrust liability, even if the entire transaction is technically above costs. (This issue is presented by the Third Circuit decision in ZF Meritor LLC v. Eaton Corporation, 696 F.3d 254 (3d Cir. 2012), which is the subject of a pending petition for certiorari in the U.S. Supreme Court.)
- A successful loyalty discount claim depends on a finding (or admission) that the seller has a monopoly, or at least some substantial market power (which may implicate attempt to monopolize doctrine in the US or abuse of dominant position claims in various non-US competition regimes). The underlying "conduct" issue appears to be whether a loyalty discount practice can change a contestable market into one that is "non-contestable", thereby suggesting that any additional discount will be illusory, because competition will be impaired in the long-run. Theories abound. Practical analysis and empirical data are missing.
So What is the Take-Away?
- Marketing and pricing practices are often subject to after-the-fact mischaracterization that is then used to create litigation risk. Evaluation of a particular situation will often turn on small bits of "evidence", memos, comments, or assumptions that a particular tactic will free the seller from competition -- even though there is no real support for the assertion.
- Where the procompetitive strategy behind a marketing plan is not clearly expressed by the company, there is a risk that the plan will be perceived as having anticompetitive objectives: why else would the firm be silent about the subject in the planning stages? All of this points to the importance of engaging experienced legal counsel to conduct an early-stage evaluation and planning whenever a company is considering significant changes to elements of its marketing and pricing strategy.
- US antitrust law applies in the United States. US-based companies always need to remember that there are major differences in competition regimes in other jurisdictions, requiring review and counsel from competition lawyers who are well-versed in these regimes.