Journal of Competition Law and Economics Advance Access originally published online on March 19, 2008
Journal of Competition Law and Economics 2008 4(2):335-374; doi:10.1093/joclec/nhn001
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BUNDLED REBATES AS EXCLUSION RATHER THAN PREDATION
JEL: K21, L1, L11, L12
Prevailing tests for whether bundled rebate programs are anticompetitive, including the recent Antitrust Modernization Commission Recommendation 17, are based on whether some incremental or total price in the rebate program is less than some appropriate incremental cost. This test presumes that rebate programs, and exclusionary conduct more generally, should be treated like predation cases. It errs in treating the buyers as end users rather than competing complement providers, as they are in all of the leading U.S. and Canadian cases. Rebate programs should be assessed on the basis of whether they raise the price of a complement, such as retailing or distribution. This suggests a different two-prong test: Does the rebate cover a competitively significant share of a complement market? If so, what effect does the rebate have on the price that rivals have to pay to obtain the complement? This test allows the use of merger guideline approaches, ignores (for the most part) cost comparisons, and does not require prior dominance in the primary market. An assessment of this approach examines when practices are exclusionary, compares rebates to exclusive dealing, distinguishes exclusionary from predatory rebates, critiques "profit sacrifice" approaches to exclusion, and proposes share-based remedies to recognize vertical efficiencies.
* Professor, Public Policy and Economics, University of Maryland Baltimore County; Senior Fellow, Resources for the Future. E-mail: brennan{at}umbc.edu. Much of this work was conducted and refined while the author was the T.D. MacDonald Chair at the Canadian Competition Bureau and, before that, a staff consultant to the Bureau of Economics of the U.S. Federal Trade Commission. The opinions expressed here are not those of the Competition Bureau, FTC, or anyone on either's staff. The author wishes to thank seminar participants at George Mason University, the Competition Bureau, Carleton University, the University of Texas at Austin, the Federal Trade Commission, the Office of Fair Trading, the Swedish Competition Authority, the Sauder School of Business at the University of British Columbia, and the 5th International Industrial Organization Conference for earlier opportunities to present this work. Particular thanks go to Roy Englert, David Evans, Ted Frech, Deirdre Hay, Bruce Kobayshi, Doug Melamed, Don Russell, Michael Salinger, and Michael Vita for questions and comments at a July 19, 2006 discussion hosted by eSapience. Finally, the author is very grateful for suggestions from Cédric Argenton, Mats Bergman, Luke Froeb, Howard Marvel, Molly Macauley, Mikko Packalen, Greg Sidak, David Spector, Niklas Strand, Scott Wallsten, and Juliet Young. None of the above necessarily agrees with my opinions—I am confident that many do not—and responsibility for errors and omissions rests solely with me.