Slide 1

Antitrust Analysis of
Bundled Discounts

Thomas A. Lambert
University of Missouri Law School

Slide 2

Agenda

• Why are bundled discounts troubling?

• Summary and critique of leading evaluative approaches

• An alternative proposal

Slide 3

The Problem:
Exclusion of an Equally Efficient, Exclusion of an Equally Efficient,
But Less Diversified, Rival

	Mfr. A		Mfr. B
	Shampoo	Conditioner	Shampoo
Average Variable Cost	$1.50	$2.50	$1.25
Separate Price	$2.00	$4.00	$2.00
Package Price	$5.00 ($1 > AVC)		No package avail. Shampoo price must be < $1.

Slide 4

Per Se Legality

• Legal if discounted price of bundle exceeds aggregate cost of products within the bundle.

• Critique:
  • May be the best approach in the long run, but…

  • The search may be worth the cost.
    • Easy to imagine a/c exclusion

    • Administrable "weeding device" is available.

Slide 5

Raising Rivals’ Costs (Unjustifiably)

• Discounts illegal if they unjustifiably usurp so much business from rivals that their so much business from rivals that their costs are raised.

• Critique: How determine what's "unjustifiable"?
  • Case by case? Chilling effect.

  • Elhauge approach?
    • Prevents price-cutting by monopolist at MES,
    • Tough to administer.
    • Chilling effect.

Slide 6

The LePage’s Approach

• Bundled discount is presumptively exclusionary if discounter is bundling products not sold by rivals and is winning business from those rivals.

• Discounter may rebut presumption if it proves a "business reasons justification" (must show that bundling saves costs approaching amount discount).

• Critique:
  • Price umbrella for less efficient rivals.
  • Will chill bundling, which has many pro-comp. benefits.

Slide 7

The Ortho Diagnostic Approach

• Bundled discount illegal if plaintiff shows either:
  • that bundle is priced below AVC, or

  • that plaintiff is at least as efficient a producer of competitive product but cannot match discount without pricing below cost on that product.

• Critique: Overly difficult to administer b/c plaintiff must prove its and defendant's costs, where there are joint costs.

Slide 8

The "Original" Antitrust Law Approach

• Illegal if the bundled discount would exclude a hypothetical equally efficient single-product rival, without adequate business justification.

• Critique: Easier to administer, but...
  • Prevents discount cross-subsidization (e.g., Seller's cost of A, B, and C is $4 each, sells them separately for $5 each, sells bundle for $13.50).

  • No requirement that foreclosed market be capable of monopolization.

Slide 9

The "Revised" Antitrust Law Approach

• Analogize to tying: There's a tie-in if the price is below cost when entire discount is attributed to competitive product. BUT not if another "significant rival" sells all products.

• After finding "tying/' apply ROR.

• Critique: Why involve tying at all?

Slide 10

An Alternative Proposal: Goals

• Condemn bundled discounts that could eliminate competitive rivals and result in price increases.
• Do not condemn others
• Be easy to administer.
• So:
• Complaining rival must have exhausted competitive options.
• Complaining rival must have ability to match efficiency.
• Foreclosed market must be capable of monopolization.

Slide 11

An Alternative Proposal: Rule

• Above-cost discount is per se legal unless plaintiff could not match without pricing below cost and:
  • (1) Barriers to entry exist in (a) product mkt in which plaintiff doesn't participate, and (b)

  • (2) Collaborative bundle impracticable.
  • (3) Good faith supply offer rejected.

• Defendant may rebut by showing that supply offer was not attractive.

Slide 12

Goals Met?

• Complainant exhausted competitive options?
  • Showings 1(a), 2, and 3 establish.

• Complainant capable of equal efficiency?
  • Defendant's failed rebuttal oppty establishes

• Mkt. capable of monopolization?
  • Showing 1(b) establishes.