Robust Exclusion and Market Division Through Loyalty Discounts

44 Pages Posted: 4 Apr 2014 Last revised: 16 Mar 2016

See all articles by Einer Elhauge

Einer Elhauge

Harvard Law School

Abraham L. Wickelgren

University of Texas at Austin - School of Law; University of Texas at Austin - Center for Law, Business, and Economics

Date Written: April 2, 2014

Abstract

We show that loyalty discounts create an externality among buyers because each buyer who signs a loyalty discount contract softens competition and raises prices for all buyers. This externality can enable an incumbent to use loyalty discounts to effectively divide the market with its rival and raise prices. If loyalty discounts also include a buyer commitment to buy from the incumbent, then loyalty discounts can also deter entry under conditions in which ordinary exclusive dealing cannot. With or without buyer commitment, loyalty discounts will increase profits while reducing consumer welfare and total welfare as long as enough buyers exist and the entrant does not have too large a cost advantage. These propositions are true even if the entrant is more efficient and the loyalty discounts are above cost and cover less than half the market. We also prove that these propositions hold without assuming economies of scale, downstream competition, buyer switching costs, financial constraints, limits on rival expandability, or any intra-product bundle of contestable and incontestable demand.

Keywords: antitrust, loyalty discounts, loyalty, discounts, market share discounts, exclusion, market division, exclusive dealing, fidelity rebates, loyalty rebates

JEL Classification: C72, K0, K21, L12, L40, L41, L42

Suggested Citation

Elhauge, Einer R. and Wickelgren, Abraham L., Robust Exclusion and Market Division Through Loyalty Discounts (April 2, 2014). Harvard Public Law Working Paper No. 14-12. Available at SSRN: https://ssrn.com/abstract=2419722 or http://dx.doi.org/10.2139/ssrn.2419722

Einer R. Elhauge (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

Abraham L. Wickelgren

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

University of Texas at Austin - Center for Law, Business, and Economics

Austin, TX 78712
United States

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