Exclusionary Bundled Discounts and the Antitrust Modernization Commission

Herbert Hovenkamp, May 08, 2008

A bundled discount occurs when a seller charges less for a bundle of goods than for its components when sold separately. A characteristic of such discounting is that a rival who makes only one of the products in the bundle may have to give a larger per item discount in order to compensate the buyer for the foregone discount on goods that the rival does not sell. For example, if I sell A and B and offer a 20% discount only to customers who purchase one A and one B together, a rival in the B market might be able to match the discounted B price. But the rival must also compensate the customer for the loss of discount on A, given that the customer would still have to purchase A from the dominant firm at the undiscounted price. As a result, a rival who is equally efficient in other respects but who makes only product B may not be able to match the discount. The final Report of the Antitrust Modernization Commission (AMC) proposed a three part test for the illegality of a monopolist's bundling under Section 2 of the Sherman Act: (1) after allocating all discounts and rebates attributable to the entire bundle of products to the competitive product, the defendant sold the competitive product below its incremental cost for the competitive product; (2) the defendant is likely to recoup these short-term losses; and; (3) the bundled discount or rebate program has had or is likely to have an adverse effect on competition. We argue that the first of these three tests must be restated in order to take into account important possibilities, such as economies of scope; even so it is seriously overdeterrent particularly when bundling is used to facilitate price discrimination, where the secondary market is competitive, or where bundling is used to disguise price cuts in oligopolistic or cartelized markets. We also argue that the AMC's recoupment test is not helpful in most circumstances, but that its requirement of a separate showing of an adverse impact on competition is essential.

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