United States: FTC And DOJ Host Conditional Pricing Programs Workshop

The Federal Trade Commission (FTC) and United States Department of Justice (DOJ) hosted a workshop on June 23, 2014 discussing the law and economics of "conditional pricing" programs.  Most panelists were academics, including economists and law school professors.  The bulk of the presenters advocated a more aggressive posture towards these arrangements than the courts have recently adopted.

Conditional pricing programs.  Conditional pricing generally encompasses pricing, discounting and contracting practices in which a company's prices charged will vary depending upon the level of purchases the customer makes from the company's competitors.   Examples include:

  • Bundled discounts: Supplier X, which sells dominant product A and competitive product B, grants a discount on product A (which the customers have to buy) so long as customers buy a certain percentage of their needs of product B from Supplier X, rather than from its competitors.
  • Loyalty / market share discounts: Supplier X, which has a dominant position in product A, grants discounts from its baseline pricing if customers purchase a high percentage (e.g., 90 percent) of Product A from Supplier X, rather than from its competitors.

Theories of harm.  The panelists discussed two basic categories of theories of competitive harm.

  • Exclusion of rival manufacturer.  When a smaller rival, perhaps a new entrant, tries to break in to a market, the dominant incumbent may impose a conditional pricing program that makes it hard for the new entrant to get a significant share of sales, which may deprive it of critical scale efficiencies and render it a marginal supplier, or perhaps even force an exit.
  • Coordination / collusion of customers / distributors.  A retailer can be viewed as providing retailing services in the sale of the manufacturer's products.  The purchases and contracts different retailers receive from manufacturers can be thought of as inputs in the retailer's provision of its services.  Some of the economists stated their view that customers who may desire to coordinate their behavior as sellers can use conditional pricing programs from their suppliers to ensure that the input costs are comparable, which can reduce competition among retailers.  For example, the conditional pricing program may ensure that no retailer switches over from the dominant supplier to the new entrant with a lower cost product.  Keeping the customers from switching to the new entrant may make it easier to achieve or maintain coordination.

Relevance of cost based tests.  The panel addressed cost-based safe harbors in great detail, with most of the economists opining that they were simply not helpful.  The issue is whether conditional pricing programs that result in a product being sold "above cost" should fit within a safe harbor. 

  • Legal background.  This discussion starts with the Supreme Court's Brook Group case, which found that above cost pricing cannot create liability under a predatory pricing theory.  In cases involving bundled /multiproduct discounts, there has been a circuit split with the Third Circuit (LePage's) allowing liability even if prices are above costs, and the Ninth Circuit (Peace Health) holding that above cost pricing is within a safe harbor.  The courts, including the Third Circuit, have generally held that in the case of a single product loyalty discount, above cost pricing is lawful.
  • Economists generally viewed the cost-based tests as not relevant.  The vast majority of the economists argued that the cost-based tests were simply not helpful in analyzing conditional pricing programs.  There are difficulties in measuring costs that make them difficult to implement.  There are also concerns about measuring what the "price" is.  In some cases, a dominant supplier could have a monopoly price of $100 for a product, but then raise it to an above monopoly price of $110 as a new entrant enters, and then offer a discount for loyalty that takes the price back down to $100.  In that case, several of the economists were of the view that there was no discount at all, but rather a "disloyalty tax."
    More importantly, the economists were of the view that even an above-cost pricing program could exclude or marginalize a new entrant trying to compete against a conditional pricing program from a dominant incumbent, which could have anticompetitive effects.  They found no economic basis for applying a safe harbor based on a test that would allow for what they viewed to be anticompetitive conduct.  In addition, the economists indicated that while the cost-based tests have some potential relevance to looking at the potential harms based on the exclusion of a smaller rival, they shed no light at all on the theory that the manufacturer's conditional pricing program is used by buyers to facilitate coordination among themselves.  There were some proponents of cost-based tests to allow for some degree of certainty for suppliers who want to discount, and who want to be sure their conduct cannot be challenged.  In essence, they argued that you need certainty to enable discounting, which is generally procompetitive.
  • Economists generally rejected any standard based on whether an "equally efficient rival" could compete above cost.  Another factor with cost-based tests is if in applying the test, courts should measure whether the seller engaging in conditional pricing is selling above its own cost, or whether the smaller competitor could meet the discount and sell above its costs.  In general, the economists were strongly of the view that even a less efficient competitor could have significant procompetitive effects on a market that has been dominated by an incumbent supplier, and therefore rejected the relevance of an "equally efficient competitor" standard focused on the seller's own costs and whether its prices were above cost.

Conclusion.  The academic community, which is likely to be influential to the antitrust agencies, generally indicated that conditional pricing programs had significant potential to be anticompetitive.  This applied equally to single product loyalty discounting programs and to multi-product "bundled discount" arrangements.  The panelists generally advocated case-by-case analyses of these programs, focused on the potential anticompetitive effects, rather than on broad safe harbors such as price / cost tests.  There seem to be some similarities between the analysis of these conditional pricing programs and the reverse payment cases that have been so predominant in the pharmaceutical industry.  In the Actavis case, the Supreme Court rejected what was essentially a safe harbor for settlements that did not extend beyond the scope of the patent, instead subjecting reverse payment cases to rule of reason analysis.  It seems that the academic community is similarly pushing for the FTC and DOJ to evaluate conditional pricing programs under the rule of reason, rather than allowing for safe harbors where price is above cost.  It appears the law in this area continues to evolve.

The agencies will be accepting comments for the next 60 days, through August 22, 2014.  In some prior situations, similar workshops have led to agency enforcement guidelines.  Companies engaged in, or potentially impacted by, conditional pricing programs may wish to comment.

FTC And DOJ Host Conditional Pricing Programs Workshop

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions