A Unifying Analytical Framework for Loyalty Rebates

79 Pages Posted: 3 Sep 2016 Last revised: 2 Nov 2017

See all articles by Fiona M. Scott Morton

Fiona M. Scott Morton

Yale School of Management; National Bureau of Economic Research (NBER)

Zachary Abrahamson

Yale University - Law School

Date Written: September 1, 2016

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.

Keywords: loyalty rebates, contracts referencing rivals, loyalty discounts

JEL Classification: K21, L42

Suggested Citation

Scott Morton, Fiona M. and Abrahamson, Zachary, A Unifying Analytical Framework for Loyalty Rebates (September 1, 2016). Available at SSRN: https://ssrn.com/abstract=2833563 or http://dx.doi.org/10.2139/ssrn.2833563

Fiona M. Scott Morton (Contact Author)

Yale School of Management ( email )

New Haven, CT 06520
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Zachary Abrahamson

Yale University - Law School ( email )

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