A Note on Loyalty Discounts


Loyalty (or “market share”) discounts have become increasingly visible in antitrust policy debates.1 Loyalty discounts are prevalent in the sale of medical devices and pharmaceutical products, especially by dominant firms,2 and are being used more frequently by firms in other industries as well. Intel’s use of them has led to antitrust proceedings by AMD,3 the European Commission,4 the New York Attorney General,5 and, most recently, the Federal Trade Commission.6

This note examines reasons firms offer for the use of loyalty discounts, the sparse case law addressing their use, and how antitrust policy might be applied going forward in evaluating their legality. The note’s analysis suggests that loyalty discounts are essentially a form of exclusive dealing. Application of the sort of price-cost test typically used in analyzing predatory pricing therefore seems inappropriate. And while use of an attribution test similar to that used in analyzing bundled pricing conduct might make sense in theory, the real-world difficulties in applying such a test to loyalty discounts render that approach impractical. The suggestion here, therefore, is to apply basic rule of reason analysis — to determine whether the impairment of rivals, net of efficiencies, is likely to reduce market output or otherwise cause material consumer harm.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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