Price-Cost Tests in Antitrust Analysis of Single Product Loyalty Contracts

Posted by Social Science Research Network

Price-Cost Tests in Antitrust Analysis of Single Product Loyalty Contracts

Benjamin Klein (University of California) &  Andres V. Lerner (Compass Lexecon)

Abstract:      This article examines the conditions when predatory pricing or exclusive dealing antitrust principles should be the controlling legal standard for the evaluation of single product loyalty discount contracts. Following Meritor, it clarifies what it means for price to be “the predominant mechanism of exclusion” in a loyalty contract, and therefore for price-cost considerations to be a relevant element of the analysis. Loyalty contracts are shown to be a way by which firms efficiently reduce the price of incremental sales, with effects similar to the commonly recognized competitive use of price discounts in Brooke Group. Rather than assuming a loyalty contract involves exclusive dealing, antitrust analysis in all cases requires determining whether a de facto exclusive dealing arrangement has been created where equally efficient rivals cannot compete for contestable sales.