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A Unifying Analytical Framework for Loyalty Rebates

 |  September 5, 2016

Posted by Social Science Research Network

A Unifying Analytical Framework for Loyalty Rebates

Fiona M. Scott Morton & Zachary G Abrahamson (Yale University)

Abstract:      This article asserts and operationalizes the principle that demand contestability determines the competitive effects of loyalty rebates. We urge antitrust courts and enforcers to recognize the construction of a loyalty rebate contract as an act with competitive consequences. These consequences turn on the interaction of three important features of the contract: the discount, the threshold, and the contestable share, all of which are chosen by the incumbent firm. Our analysis shows that the impact on competition is unlikely to be found by applying existing marginal cost rubrics.

In place of the fractured analogical reasoning that characterizes American discounting doctrine today, we simplify by using the characteristics of a loyalty rebate contract to calculate one metric – the penalty imposed on the entrant by the rebate contract. Specifically, we measure how much the entrant must lower price on its own units – the burden it faces – in order to fully counteract the financial incentives the rebate contract creates for customers. This “effective entrant burden” measures the extent to which the dominant firm leverages its non-contestable assets into anti-competitive exclusion. The size of this penalty, we assert, makes sense of the divergent holdings of courts confronted with loyalty rebate disputes.