Consider a monopolist in one market that faces competition in a second market. Bundled loyalty discounts, in which customers receive a price break on the monopoly good in exchange for making all purchases from the monopolist, have ambiguous welfare effects. To analyze such discounts as predatory pricing is incorrect. In some settings, they act as tie-in sales. Existing tests for whether such discounts violate Section 2 of the Sherman Act do not track changes in consumer surplus or total surplus. We present a new test and use it in an illustrative example based on SmithKline that assumes the "tied" market is a homogeneous good. If the tied market is characterized by Hotelling competition, bundling by the monopolist causes the rival firm to reduce its price. In numerical examples, we find that this can deter entry or induce exit.

The Third Circuit's decision in Lepage's v. 3M created a great deal of uncertainty about the legality of so-called bundled discounts - i.e., discounts (or rebates) conditioned upon purchasing multiple products from disparate product markets. This paper, prepared for a joint Department of Justice/Federal Trade Commission hearing on single-firm exclusionary conduct, describes the competitive risk bundled discounts present, summarizes and critiques the six leading approaches courts and commentators have proposed for evaluating the legality of such discounts, and proposes an alternative evaluative approach.

Antitrust law has become dominated by economics. With its chief end the enhancement of economic welfare through the preservation of the competitive process, antitrust jurisprudence now seeks to follow consensus economic theory. Antitrust liability rules are thus based on prevailing economic views. But what are courts to do when there is no consensus on the economics underlying particular conduct? How can the courts rationally develop antitrust liability rules when the economic analysis of certain conduct is unsettled? That is the case with loyalty rebates and bundled discounts, through which price rebates or discounts are conditioned on the customer purchasing a certain percentage of its requirements or multiple products from the seller. There is no established framework of analysis for conduct involving rebates. There is no long line of cases. There is no “great weight of scholarly opinion” presenting a consensus view. Economists and scholars simply disagree on when such practices may harm competition. Rebates thus offer a rare window into the development of antitrust jurisprudence in the absence of a consensus economic theory. Existing case law presents three analogies -- exclusive dealing, tying, and predatory pricing. Judicial decisionmaking regarding rebates is thus a study in analogical reasoning. But what is sorely missing from the current jurisprudence are in-depth analyses of the efficacy of these analogies. Fuller examination of the three analogies reveals flaws in each. But this examination also points to a better solution.

A bundled discount occurs when a seller conditions a discount or rebate on the buyer's purchaser or two or more different products. Firms that produce fewer than all the good in the bundle find it difficult to compete because they must amortize the discount across a smaller range of goods. For example, if the dominant firm offers a 10% discount for purchase of both good A and good B, but the rival makes only good B, it will have to offer a discount that is large enough to match the dominant firm's B discount as well as the foregone discount on A. The Antitrust Modernization Commission and several courts have adopted an quot;attributionquot; test for assessing the antitrust legality of bundled discounts. The test attributes the full discount to the product(s) for which rivals are claiming exclusion, and asks whether the resulting price is below cost. This test contains some features of the cost-based rule for single product predatory pricing, but it also differs in important respects. Both tests query whether an equally efficient rival can match the dominant firm's price. On the other hand, bundles that fail the attribution test can still be quot;sustainable.quot; That is, they need not involve pricing below cost, and thus their success does not depend on recoupment during a subsequent period of higher prices.Most models of bundled discounting consider two goods that are purchased in a one-to-one ratio. None of the judicial decisions involve such simplicity. In most the bundle consists of more than two goods, and different rivals may produce differing subsets of the dominant firm's bundle. Further, in nearly all of the cases the proportion of goods in the bundle can be varied at the will of the customer. We show that in such situations antitrust analysis of the bundle is significantly more complex and anti-competitive exclusion must typically be assessed on a rival-by-rival and customer-by-customer basis. This has important implications for the certification of class actions in bundled discount cases. We also provide some apparatus for assessing bundled discounts in these situations.

Loyalty discounts lie at the heart of the debate on single firm conduct, probably the most controversial issue in contemporary antitrust practice. Under particular conditions, loyalty discounts may have an exclusionary effect. However, they constitute a classical form of price competition, an effective commercial tool and a way to solve coordination problems in the production chain. In the United States, the fear to lessen price competition has led to a very strong presumption of legality of discounts, provided that they are not predatory or bundled. In the EU, the tendency to induce loyalty, if not a mere intent to exclude rivals, is traditionally deemed to be enough to justify the prohibition of the practice. In the paper, it is submitted that the opposite (almost) per se rules prevailing on the two sides of the Atlantic should be set aside. A detailed analysis, based on a suitable price-cost test and a careful assessment of the impact of the practice on the competitive capacity of minor rivals and on the overall degree of competition in the market concerned, would allow to intervene in cases of seriously exclusionary discount policies, while limiting the unnecessary prohibition of effective forms of price competition.