EU Competition Law

Prof.
Damien Geradin
Tilburg University and Howrey LLP
Single-Product Loyalty Discounts and Rebates

This part of the questionnaire seeks information on ICN members analysis and
treatment of loyalty discounts and rebates. The information provided will serve as the
basis for a report that is intended to give an overview of law and practice regarding
loyalty discounts and rebates in the respective jurisdictions.
Unless otherwise stated, the questions concern unilateral conduct by a dominant firm
or firm with significant market power.
For this questionnaire, loyalty discounts and rebates are defined as discounts or
rebates on units purchased of a single product, conditioned upon the level or share of
purchases.
This part of the questionnaire concerns only treatment of single-product discounts
rather than pricing practices involving multiple products (bundling, tying, and related
practices).
You should feel free not to answer questions concerning aspects of your law or policy
that are not well developed. Answers should be based on agency practice, legal
guidelines, relevant case law, etc., rather than speculation.
EXPERIENCE
1. Please state the statutory provisions or legal basis that allow your agency to
address loyalty discounts and rebates. Are loyalty discounts and rebates a
civil and/or a criminal violation of your jurisdictions antitrust laws? Do
these provisions apply only to dominant firms or to other firms as well?
Under EC competition law, Article 82 of the EC Treaty (Article 82 EC) is the
statutory provision applicable to loyalty discounts and rebates. Article 82 EC
prohibits undertakings from committing an abuse of a dominant position held within a
substantial part of the common market and which affects trade between the Member
States. Thus, Article 82 EC does not apply to loyalty discounts and rebates granted
by a non-dominant firm.
Article 82 EC does not prohibit per se the grant of loyalty discounts and rebates by a
dominant undertaking. There is only a breach of Article 82 EC where a dominant
undertaking uses loyalty discounts and rebates as a tool to abuse its dominant
position. In this case, the undertaking will be imposed a fine by the European
Commission, which is not of criminal nature. 1 In fact, there are no criminal
penalties, such as imprisonment for individuals, for breach of EC competition law.
The exact nature of the fines imposed by the European Commission for breach of EC
competition law is still widely debated. They have often been described as
administrative in nature or character and have been compared to the French
1
Article 23(2) and 23(5) of Council Regulation 1/2003 of 16 December 2002 on the
implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty,
(2003) O.J. L 1/1.
Prof. Damien Geradin

sanctions administratives or the penalities imposed under the German Gesetz ber
Ordnungswidrigkeiten. 2
2. How many in-depth investigations (i.e., beyond a preliminary review) of
loyalty discount and rebate programs has your agency conducted during the
past ten years? Please describe what prompted the investigations (e.g.,
competitor complaints).
In the past ten years, the European Commission has conducted 11 in-depth
investigations in relation to rebates and loyalty discounts granted by a dominant firm,
namely:
(i)
Intel (MEMO/07/314, 27.07.2007 and MEMO/08/517, 17.07.2008): no

information on who triggered the investigation.
(ii)
Case COMP/38.113 Prokent/Tomra, 29 March 2006: Case initiated

following a complaint from Prokent
(iii)
Euronext (see Report on Competition Policy 2005): no information on

who triggered the investigation.
(iv)
COMP/39.116 Coca-Cola [2005] OJ L 253/21: no information on who

triggered the investigation.
(v)
COMP/37.409 Interbrew (Press release IP/04/574, 30.4.2004): Case

opened on the European Commissions initiative.
(vi)
COMP/33.133-C Soda Ash Solvay [2003] OJ L10/10 and

COMP/33.133-D: Soda Ash ICI [2003] OJ L10/33: 3 Case re-opened
on the European Commission own initiative.
(vii)
COMP/E-2/36.041/PO Michelin II [2002] OJ L143/1: Case opened on

the European Commissions own initiative.
(viii)
COMP/35.141 Deutsche Post (I) [2001] OJ L 125/27. Case opened

following a complaint from Uni Parcel Service.
(ix)
COMP/36.915 Deutsche Post (II) [2001] OJ L 331/40. Case opened

following a complaint from the British Post Office.
(x)
Case IV/D-2/34.780 Virgin/British Airways [2000] OJ L30/1: Case

opened following a complaint from Virgin Atlantic Airways Limited.
(xi)
Case IV/35.703 Portuguese airports [1999] OJ L 69/31: Case opened

(pursuant to Article 86 EC) on the European Commissions own
initiative.
3. State the number of loyalty discounts and rebate programs that your agency
found to be unlawful over the past ten years (1999 to date); include cases
resolved informally as well as those that led to a formal decision. If your
agency has found any loyalty discounts and rebate programs to be unlawful,
2
3
Kerse & Khan, EC Antitrust Procedure, (2005, Fifth Edition), para. 7-008.
Replacing Soda Ash ICI and Soda Ash Solvay (respectively [1991] OJ L152/40 and 152/21,
[1994] 4 CMLR 645 annulled for procedural reasons).

please describe the anticompetitive effect and the circumstances that led to
the finding.
For administrative systems (i.e., the agency issues its own decisions on
the legality of the conduct, which may be appealable in court), state the
number of agency decisions finding a violation or settlements that were
challenged in court and, of those, the number upheld and overturned.
For judicial systems (i.e., the agency challenges the legality of the
conduct in court and the court issues a decision), state the number of
cases your agency has brought that resulted in a final court decision that
the conduct violates the competition law or a settlement that includes
relief. Also state the number of cases that resulted in a final court
decision that the conduct did not violate the competition law.
Please state whether any of these cases were brought under a criminal
antitrust law.
Please provide a short English summary of the leading loyalty discount
and rebate cases in your jurisdiction, and, if available, a link to the
English translation, an executive summary, or press release.
1. Cases of exclusionary rebates which have not been appealed to the

Community Courts
(a) Deutsche Post (II)
In Deutsche Post (II), the European Commission in its statement of objections
considered that Deutsche Post was abusing its dominant position by employing a
combination of fidelity and target rebates that foreclosed competition. The
European Commission then did not pursue this charge in its final decision of
illegality.
See the 2000 Report on Competition Policy at p.40, available at:
http://ec.europa.eu/comm/competition/annual_reports/2000/competition_policy/en
.pdf
(b) Deutsche Post (I)

In Deutsche Post (I), the European Commission found that Deutsche Post had
abused its dominant position among other things by granting exclusionary rebates
contrary to Article 82 EC.
More specifically, Deutsche Post had granted to its customers fidelity rebates
either conditioned upon exclusivity or conditioned upon the customer purchasing
a certain amount (in volume or in %) of its total requirements. These rebates were
linked to an estimate of each customers presumed capacity of absorption.
Deutsche Post appealed the decision of the European Commission before the

Community Courts but did not raise any grounds of appeal related to the
decisions findings on rebates (see Judgment of the Court of First Instance, 1 July
2008, Case T-266/02, Deutsche Post AG v. Commission).
The European Commissions decision is available at: http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32001D0354:EN:HTML
See also the 2001 Report on Competition Policy at p.44, available at:
http://ec.europa.eu/comm/competition/annual_reports/2001/en.pdf
(c) The Soda Ashes cases
In the Soda Ashes cases, the European Commission condemned ICIs and
Solvays pricing structure which consisted of top-slice rebates.
Top-slice rebates were rebates where the basic tonnage in soda ash was sold at the
normal price, but the additional quantities that the customer might otherwise have
bought from another supplier the top slice were offered at a substantial
discount. The European Commission concluded that these rebates were
exclusionary. The European Commission adopted its first decisions in the early
1990s. The Community Courts annulled these decisions on purely procedural
grounds on appeal. The European Commission re-adopted these decisions in
2003.
These decisions are available at:
http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32003D0006:EN:HTML
and
http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32003D0007:EN:HTML
(2) Cases of exclusionary rebates under appeal
In Prokent/Tomra, the European Commission issued a final decision whereby it
found that Tomras rebates were contrary to Article 82 EC. This decision is under
appeal.
In this case, the European Commission concluded that Tomras practices,
consisting of a system of exclusivity agreements, quantity commitments and
loyalty-inducing discounts, restricted or at least delayed the market entry of other
firms. In doing so, the European Commission analysed the effects of Tomras
practices on the RVMs [Reverse Vending Machines] market, on competition in
each of the investigated countries.
The decision is available at:
http://ec.europa.eu/comm/competition/antitrust/cases/decisions/38113/decision_en
.pdf

(3) Cases of exclusionary rebates which have been appealed to the

Community Courts
In the three following cases, the Community Courts have upheld the European
Commissions finding that the rebates in question breached Article 82 EC.
(a) British Airways
In British Airways 4 the Community Courts upheld the European Commissions
decision in its entirety. The European Commission condemned a rebate scheme
granted by British Airways as a loyalty discount contrary to Article 82 EC. The
scheme included financial compensation to travel agents in return for meeting or
for exceeding their previous years sales of BA tickets. The payments under the
scheme rolled back in the sense that the travel agents received an increase in
commission not just on the tickets sold thereafter but also on all the tickets sold in
the reference period. The Courts indicated that two cumulative conditions must
be fulfilled for a loyalty rebate to infringe Article 82 TEC: (i) there must be
evidence of exclusionary effects (the effects-based approach), and (ii) the rebate
cannot be justified by pro-competitive efficiencies and/or objective economic
considerations (the rule of reason approach).
The judgments of the Court of First Instance and of the European Court of Justice
are available at:
http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61999A0219:EN:HTML
and
http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62004J0095:EN:HTML
(b) Michelin (II)
In Michelin (II), 5 Michelin was found to have operated a wide range of rebate
schemes in respect of the supply of replacement tires. The European Commission,
upheld by the Court of First Instance, condemned all of them under Article 82 EC
as constituting fidelity rebates with an exclusionary effect.
More precisely, Michelin was condemned for having granted the following
rebates:
Case T-219/99, British Airways v. Commission [2003] ECR II-5917 and Case C-95/04 P,
British Airways v. Commission, 15 March 2007
Case T-203/01, Manufacture Franaise des Pneumatiques Michelin v. Commission [2003]
ECR II-04071

- A so-called progress bonus which was rewarded if the customer increased his
purchase of Michelin tires compared to the previous year. These targets were
individualized and varied from dealer to dealer;
- Standardized quantity rebates which were granted following a grid. Where the
dealer went up a step by hitting a particular target the extra discount rolled
back, i.e. the dealer obtained an extra rebate not only on the last tranche but
also on all the previous purchases in the reference period;
- A so-called service bonus which was a point system where the dealer would
earn points if he achieved a minimum percentage of purchases of Michelin
products and if he committed to systematically return used Michelin tires for
retreading; and
- A so-called Michelin Friends Club, a rebate which consisted in additional
payments if the dealer undertook not to divert spontaneous demand away from
Michelin, to keep in stock enough Michelin tires to be able to respond to
customer demand and to give Michelin certain sales forecasts in statistics.
Michelin appealed to the Court of First Instance primarily in respect of the
quantity rebates, the service bonus and the Michelin Friends club.
The judgment of the Court of First Instance is available at:
(c) Irish Sugar
In Irish Sugar 6 the European Commission condemned rebate schemes which were
conditional on the customer buying more than in a previous period. Moreover, the
rebates were calculated in such a way that they were only available to customers
who purchase the totality or the near-totality of their requirements with Irish
Sugar. The European Commission, in a decision upheld by the Community
Courts, concluded that such rebates had an exclusionary effect.
The judgments of the Court of First Instance and of the European Court of Justice
are available at:
and
http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61999O0497:EN:HTML
Case T-228/97, Irish Sugar plc v Commission [1999] ECR II-2969, confirmed on appeal by
Case C-497/99 P, Irish Sugar plc v Commission [2001] ECR I-5333.

(4) Cases of discriminatory rebates
In Case C-163/99, Portugal v. EC Commission [2001] ECR I-2613, the European
Commission brought an action against the Portuguese Republic for breach of
Article 86 EC 7 on the basis that the system of discounts on landing charges at
Portuguese airports administered by ANA-EP was discriminatory.
The Court of Justice upheld the findings of the European Commission and ruled
that to be non-abusive, a quantity rebate must not be discriminatory.
The judgment is available at:
http://eurlex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&nu
mdoc=61999J0163&lg=en
4. Does your jurisdiction allow private parties to challenge loyalty discounts

and rebates in court? Yes/No. If yes, please provide a short description of
representative examples of these cases. If known, indicate the number of
cases brought (or an estimate thereof) by private parties.
The Court of First Instance and the Court of Justice do not have jurisdiction to
hear actions brought by private parties against other private parties for breach of
competition law. However, private parties may challenge anticompetitive loyalty
rebates before national courts. Examples will thus be found in the national
reports.
EVALUATIVE CRITERIA
5. In your jurisdiction, is the term single-product loyalty discounts and rebates
used in a manner different from the definition in the first paragraph above?
If so, how?
In this Questionnaire, loyalty discounts and rebates are defined as discounts or
rebates on units purchased of a single product, conditioned upon the level or share
of purchases.
Under the current case law of the Community Courts, the definition of loyalty
discounts and rebates is different from the definition given in this Questionnaire.
In a nutshell, Article 86 EC addresses the issue of the application of EC competition law to

state measures in relation to public undertakings and to undertakings entrusted with special or
exclusive rights and those entrusted with services of general economic interest. Article 86(1)
prohibits a Member State to adopt measures in relation to public undertakings and those to
which they grant special exclusive rights which would deprive EC competition law of its
effectiveness.

Following Hoffmann-La Roche 8 (which laid down the basis for the treatment of
loyalty rebates before the reform brought by the European Commissions
Discussion Paper on Article 82 EC presented below), a basic distinction was
made between loyalty rebates and quantity rebates. Loyalty rebates were closely
linked with the issue of exclusivity in EC competition law. Loyalty rebates were
defined as rebates granted in return for an undertaking by the customer to obtain
his stock exclusively or almost exclusively from an undertaking in a dominant
position, 9 independently of whether the quantities purchased were large or small.
Quantity rebates were defined as rebates exclusively linked with the volume of
purchase from the producer concerned. 10
Therefore, under the EC case law on rebates, the concept of loyalty rebate has a
different and more restrictive meaning than the one suggested in this
Questionnaire. Loyalty rebates, as understood by the EC case law, only
encompass rebates which require that the customer purchases exclusively or
almost exclusively all of its requirements from a dominant undertaking. Unlike
this Questionnaire, the definition under the EC case law does not include under
the term loyalty rebates all rebates which are conditioned upon a level or share
of purchases.
Finally, it is important to note that the formal categorization of rebates between
loyalty rebates and quantity rebates has largely become obsolete in EC
competition law. In its Discussion Paper of December 2005 on the application of
Article 82 EC to exclusionary abuses, 11 the European Commission abandons this
formalistic distinction in favor of more economic approach towards rebates.
The Discussion Paper distinguishes between single-product and multi-product
(bundled) rebates (which is the subject of another Questionnaire). It also
distinguishes between conditional and unconditional rebates and proposes a
detailed economic analysis for each category. Conditional rebates12 are defined as
rebates granted to customers to reward a specific purchasing behavior over a
particular period of time. As far as conditional rebates are concerned, the
Discussion Paper makes a further distinction between all-unit rebates (whereby
the conditional rebate is available to all purchases below and above the threshold
once it is exceeded) and incremental rebates (whereby the conditional rebate is
available only to incremental purchases above the threshold once it is exceeded).
On the other hand, unconditional rebates are defined as rebates granted to
customers independently of their purchasing behaviour. 13
8
9
10
11
12
13
See Case 85/76, Hoffman-La Roche v. Commission [1979] ECR 461.

See Case T-203/01, Manufacture Franaise des Pneumatiques Michelin v. Commission
[2003] ECR II-04071, 56.
See Case 85/76, Hoffman-La Roche v. Commission [1979] ECR 461, 90.
Available at http://ec.europa.eu/comm/competition/antitrust/art82/discpaper2005.pdf
See Discussion Paper, 151.
Idem. 171.

6. What are your jurisdictions criteria for evaluating the legality of loyalty
discounts and rebates?
a. What anticompetitive effects or other criteria make loyalty discounts
and rebates abusive? Must the practice exclude or threaten to exclude
rivals from the market? If only threatened exclusion is required, how
is it determined? If neither actual nor threatened exclusion is
required, what other factors are considered?
Under the current EC case law on rebates, a loyalty rebate (as defined in the
first paragraph of this Questionnaire) infringes Article 82 EC only if (a) it
threatens to exclude competitors because notably it applies to a substantial share
of the customers on the market and (b) it is not justified by economic
considerations (such as, for instance, the realization of economies of scale).
On the other hand, the Discussion Paper, which represents the European
Commissions most recent thinking on Article 82 EC, applies a more detailed
economic approach towards such loyalty rebates. The potential foreclosure effect
of a rebate is first screened under a price-cost test. If the loyalty rebate fails the
price-cost test, the European Commission will examine whether the rebate
actually has substantial foreclosure effects (notably whether the rebate covers a
substantial part of market demand and whether actual foreclosure effects can be
observed). If this is the case, the European Commission will determine whether
the rebate can be objectively justified; and/or generates pro-competitive
efficiencies. 14
We provide below a more detailed explanation of these tests in their historical
context.
The applicable test to loyalty discounts and rebates under the EC case law
As explained in our answer to Question 5, the EC case law on rebates
distinguishes between loyalty rebates and quantity rebates.
Before Michelin II, quantity rebates were considered not to have a foreclosure
effect contrary to Article 82 EC as they were deemed to reflect gains in
efficiencies and economies of scale made by the undertaking in a dominant
position. On the other hand, loyalty rebates (i.e. rebates conditioned upon
exclusivity) were considered to prevent customers from obtaining supplies from
competitors 15 and were presumed capable of exclusionary effects contrary to
Article 82 EC. 16
After Michelin II and British Airways, the distinction between loyalty rebates and
quantity rebates and their legal applicable test have become increasingly blurred.
14
15
16
Ibid. 84.
See Case T-219/99, British Airways v. Commission [2003] ECR II-5917, 248.
See Case T-203/01, Manufacture franaise des pneumatiques Michelin v. Commission, [2003]
ECR II-4071 (Michelin II) at 239.

More precisely, in Michelin II, the Court of First Instance ruled that only quantity
rebates which were based on demonstrable economic justification complied with
Article 82 EC. Michelin II is often seen as an example of the most restrictive,
form-based approach that the Court of First Instance (Michelin did not appeal this
judgment) has ever taken towards rebates, and has been sharply criticized as such
by legal commentators and by the European Commission itself. 17
Thus, a few months later, in British Airways, the Court of First Instance ruled that
loyalty rebates which were based on economically justified considerations also
complied with Article 82 EC. On appeal, the Court of Justice upheld in its
entirety the Court of First Instance judgment. Whilst maintaining the traditional
distinction between quantity rebates (which do not raise antitrust concerns) and
loyalty rebates (i.e. exclusive rebates which are deemed to have exclusionary
effects contrary to Article 82 EC), the Court of Justice held that the legality of
rebates which fell in neither of these categories (the third category which
includes therefore loyalty rebates as defined in the first paragraph of this
Questionnaire must be assessed on a case-by-case basis in the light of two
following criteria:
(i)
Whether the rebate produces likely or actual exclusionary effects in that

they make entry very difficult or impossible for competitors and make it
more difficult or impossible for the customer to choose other sources of
supply; and
(ii)
(ii) Whether the

considerations. 18
rebate
is
objectively
justified
by
economic
Finally, it should be noted that when assessing the legality of a rebate, the
Community Courts have constantly taken into account the level of foreclosure:
only rebate regimes which foreclosed a substantial portion of customers on the
market have been found illegal. Indeed, if a loyalty rebate is available to only a
small number of customers, then the rebate cannot restrict competition since there
is a viable access to the market for competitors of the dominant firm. This
approach is also reflected in other areas of Article 82 EC case-law. As regards
exclusive dealing, which generally has greater anti-competitive potential than
17
18
See notably the speech delivered by Philip Lowe (Director General of the Directorate General
for Competition of the European Commission) at the Fordham Antitrust Thirtieth Annual
Conference on International Antitrust Law and Policy Conference in Washington 23 October
2003: We, I think as you, were slightly surprised at the Court of First Instances analysis in
Michelin II, that it placed so great an emphasis on per se rules and on certain types of conduct
and did not go into any further economic analysis of the case.
Or, in the words of the European Court of Justice, a firm granting such rebates is at liberty to
demonstrate that its bonus system producing an exclusionary effect is economically justified.
(Case C-95/04 P, British Airways plc v Commission, [2007] ECR I-2331, 69 and 86). See
also Conclusions of Advocate General Juliane Kokott in British Airways, C-95/04P, 23
February 2006, pt. 56 to 59 Not all rebates and bonuses which a dominant undertaking grants
to its contractual partners and produce a foreclosure effect are necessarily abusive and
therefore prohibited under Article 82 EC. According to consistent case-law, such rebates and
bonuses are to be regarded as abusive only if they are not based on an economic transaction
which justifies them. If there is a discernible objective economic justification for the rebates or
bonuses, they are not to be regarded as abusive, despite their foreclosure effect. (emphasis
added)
10

rebate schemes, since competitors are excluded even if they offer a more attractive
price, both the EC Courts and the European Commission have carefully analyzed
inter alia whether the market coverage was sufficiently high to cause significant
foreclosure effects. 19
The new approach towards loyalty discounts and rebates under the Discussion
Paper
At the time of the Michelin II judgment, the European Commission became
increasingly conscious of the necessity to adopt an enhanced economic approach
towards Article 82 EC and to abandon, as a consequence, a form-based
application of that provision. The efforts to modernize the application of Article
82 EC led to the publication by the Directorate General for Competition of a
Discussion Paper in December 2005. The Discussion Paper formalizes the
European Commissions move towards an effects-based standard with regard to
exclusionary abuses, including rebates.
More precisely, depending on the nature of these rebates (i.e. conditional or
unconditional), the European Commission proposes to use different types of a
price-cost-test to screen their foreclosure effects. Such price-cost tests will be
discussed in our answer to Question 6(c). The aim of these tests is to determine
whether a given rebate regime can foreclose as efficient competitors to supply a
given customer of the dominant firm.
These price-cost tests only represent the first step in the assessment of a
conditional rebate. If the application of a price-cost test shows that the conditional
rebate in question can foreclose as efficient competitors from supplying a given
customer, the next step in the inquiry is to determine whether the rebate has
substantial foreclosure effects. The Discussion Paper suggests that this second
step in the analysis should be based on a review of additional factors, such as:
19
20
21
22
(i)
The incidence of the rebate on the market, i.e., whether the rebate
affects a substantial part of market demand or whether, on the
contrary, the rebate is only offered to a few selected customers of the
dominant firm, in which case the (negative) incidence of the rebate
may be minimal; 20 and
(ii)
Measures of market performance which are considered signs of a

healthy competitive market and of the lack of foreclosure effect of the
rebate. 21 It follows that when a rebate scheme has been in place for
some time the analysis of actual effects plays a decisive role. 22
See Case T-65/98, van den Bergh Foods [2003] ECR I-4653, upheld by the ECJ in Case C552/03 P, Unilever Bestfoods [2006] ECR II-9091, and Commission Decision of 11 October
2007 in Case COMP/37966 Distrigas.
See Discussion Paper, 59 and 162(d).
Ibid. 162(e).
See also Discussion Paper 55 which provides that Article 82 prohibits exclusionary conduct
which produces actual or likely anti-competitive effects in the market and which can harm
consumers in a direct or indirect way. The longer the conduct has already been going on, the
more weight will in general be given to actual effects.
11

When the conditional rebate in question has substantial foreclosure effect, the next
steps in the analysis are to determine: 23
(i)
whether the rebate can be objectively justified; and/or
(ii)
the rebate generates pro-competitive efficiencies. 24
b. Does intent play a role, and if so what role and how is it

demonstrated?
As explained in our answer to Question 1, rebates are analysed under Article 82
EC which prohibits dominant undertakings from abusing their position. The
concept of abuse under Article 82 EC is an objective concept relating to the
behaviour of an undertaking in a dominant position. 25 Therefore, intent does not
in principle play any role in a finding of illegality under Article 82 EC. As will be
seen below, the intent of the dominant firm granting a rebate may be a relevant
factor when such a rebate is assessed under a predation test (see our response to
Question 6, c).
c. Does price-cost comparison play a role? If so, please describe the

comparison(s) used and the role that it plays.
In your answer, you may wish to address the following sorts of issues:
What cost measures are used (e.g., average variable cost, average
avoidable cost, average total cost)? Are price and cost compared with
respect to all of a firms sales to a particular customer or only with
respect to incremental sales? How significant a role does the cost test
play (e.g., is pricing below the relevant cost measure required or a prerequisite to prove illegality? Does pricing above cost prove legality?)
Please also indicate if recoupment plays a role and, if so, what role it
plays.
Under the current EC case law on rebates, the Community Courts make no
reference to the use of a price-cost comparison to assess the legality of rebates.
This can be explained by the fact that, as they are prohibited from ruling ultra
petita, the judgments rendered by the Community Courts in rebate cases have
been limited to the review the legality of decisions rendered by the European
Commission. As, in turn, these decisions were rendered prior to the Discussion
Paper, they do not make reference to a price-cost test.
In the Discussion Paper, the European Commission has introduced a price-cost
test to analyze whether rebates granted by dominant firm can have foreclosure
effects. Reliance on price cost tests has been confirmed in the European
Commissions contribution to the 2008 OECD Roundtable on bundled and loyalty
23
24
25
Ibid. 172-176.
Ibid. 84.
See Case 85/76, Hoffman-La Roche v. Commission [1979] ECR 461, 91.
12

discounts and rebates (the 2008 Contribution). 26 In both documents, the
European Commission makes clear that it uses an as efficient competitor test.
This means that a rebate scheme will not be considered anti-competitive if it
would only foreclose competitors that are less efficient than the dominant firm.
When applying the as efficient competitor test, the European Commission uses the
dominant firms costs.
Finally, under current EC competition law, recoupment does not yet play a central
role in the assessment of the legality of a rebate.
For each kind of rebates, we present a summary of the European Commissions
approach under the Discussion Paper and the 2008 Contribution.
1) Unconditional rebates
As far as unconditional rebates are concerned, the Discussion Paper states that the
European Commission will assess possible exclusionary effects by applying a
predation test to such rebates and the resulting lower prices for certain customers.
The 2008 Contribution does not change this framework of analysis.
This test is the following:
26
27
28
Where the effective price (i.e., the standard list price minus the rebate) is
lower than average avoidable costs (AAC) 27 , the rebate is presumed
predatory. In this case, the European Commission examines whether the
rebate can be objectively justified; and/or generates pro-competitive
efficiencies. 28
Where the effective price is above average total costs (ATC), the rebate is
presumed non predatory.
When the effective price is above AAC but below ATC, unlawful predation
can only be established on the basis of additional evidence of a plan or a
strategy to predate. There is proof of such strategy where there is direct
evidence of intent; evidence that the pricing only makes commercial sense as
part of a predatory strategy; the actual or likely exclusion of the prey; whether
certain customers are selectively targeted; whether the dominant undertaking
actually incurred specific costs in order for instance to expend capacity;
whether there is recoupment etc.
European Commission, Roundtable on Bundled and Loyalty Discounts and Rebates;

DAF/COMP/WP3/WD(2008)48 (the 2008 Contribution).
AAC is the average of the costs that could have been avoided if the company had not
produced a discrete amount of (extra) output, in this case the amount allegedly the subject of
abusive conduct. In most cases, the average variable cost (AVC) and AAC will be the
same, as it is often only variable costs that can be avoided (2008 Contribution, footnote 12).
The European Commission however considers that [a]n efficiency defence can in general not
be applied to predatory pricing. It is highly unlikely that clear efficiencies from predation can
be shown and even when they exist that predation is the least restrictive way to achieve them.
In addition it is similarly unlikely that, in the case that such benefits arise, that in the longer
run some of these benefits are passed on to the customers and that these benefits outweigh the
loss of competition brought about by the predation. (Discussion Paper, 133).
13

Where the examination of the evidence reveals that there is no predatory
intent, the rebate is presumed non predatory.
Where the evidence reveals that there is a predatory intent, the European
Commission will examine whether the rebate can be objectively justified;
and/or generates pro-competitive efficiencies.
2) Conditional Incremental rebates

a)
Framework of analysis for conditional incremental rebates under the

Discussion Paper
Incremental rebates under the Discussion paper are subject to a predation test
relatively similar to the one applicable to unconditional rebates. Thus, if the
effective price is above ATC, the rebate is presumed non predatory. If, on the
contrary, the effective price is below ATC, the European Commission will
examine whether the rebate has foreclosure effects (looking at, for instance, the
market coverage of the rebate, whether and the extent to which rivals have
counterstrategies at their disposal etc.). If the rebate has foreclosure effects, the
European Commission will examine whether the rebate can be objectively
justified and/or generates pro-competitive efficiencies.
The European Commission also indicates that incremental rebates with a
standardized threshold are less likely to produce anticompetitive foreclosure
effects than incremental rebates with an individualized threshold or where the
threshold is set in terms of a percentage of total requirements of the buyer.
b) Framework of analysis of conditional incremental rebates under the 2008
Contribution
In the 2008 Contribution, the European Commission continues to apply a
predation test to incremental rebates. The 2008 Contribution introduces the long
run average incremental cost (LRAIC) 29 as the relevant cost benchmark (instead
of the ATC cost benchmark used in the 2005 Discussion Paper).
The effective price that the customer faces in deciding from whom to purchase,
and which the rival will thus have to match, is the standard (list) price less the
rebate it loses by switching, calculated over the incremental purchases
considered. 30 Once the effective price is calculated, the European Commission
compares this price with the dominant undertakings costs.
29
30
LRAIC is the average of all the (variable and fixed) costs that a company incurs to produce a
particular product. Average total cost (ATC) and LRAIC are good proxies for each other, and
are the same in the case of single product undertakings. If multi-product undertakings have
economies of scope, LRAIC would be below ATC for each individual product, as true
common costs are not taken into account in LRAIC (2008 Contribution, footnote 10).
2008 Contribution, 16.
14

Where the effective price is lower than the average avoidable costs (AAC),
the rebate is presumed predatory. In this case, the European Commission will
examine whether the rebate can be objectively justified; and/or generates procompetitive efficiencies.
Where the effective price is above LRAIC, the rebate is presumed non
predatory.
When prices are above AAC but below LRAIC, the European Commission
will investigate whether other factors point to the conclusion that entry or
expansion by as efficient competitors is likely to be affected. In this context, it
will review the market coverage of the rebate, whether and the extent to which
rivals have counterstrategies at their disposal etc. Where competitors do not
have sufficient possibilities to match the effective price, the European
Commission will conclude that the rebate is capable of foreclosing as efficient
competitors. 31 In this case, the European Commission will examine whether
the rebate can be objectively justified; and/or generates pro-competitive
efficiencies.
Like in the Discussion Paper, the European Commission notes that incremental
rebates with a standardized threshold are less likely to produce anticompetitive
foreclosure effects than incremental rebates with an individualized threshold.
3) Conditional all-unit rebates
a) Framework of analysis of conditional all-unit rebates under the
Discussion Paper
Under the Discussion Paper, all-unit rebates are subject to a complex suction
effect test described hereafter. The suction effect test is a tool to assess when a
rebate scheme can exclude efficient rivals from the contestable part of a
customers demand. The suction effect test involves the following scenario.
A dominant supplier sells to a particular company. The supplier has an assured
base of sales to that customer because, for a portion of the customers demand,
there are no proper substitutes. 32 These sales represent the non-contestable share
of that companys demand. However, the portion of the customers demand for
which substitutes are available is the commercially viable share, or the
contestable share, of that customers demand. 33 The dominant supplier offers the
company an all-unit rebate. This gives the customer a rebate if it purchases more
than the rebate threshold level within the reference period. 34 The quantities
highlighted in bold are shown schematically below.
31
32
33
34

Discussion Paper, 143.
Idem. 156.
Idem. 152.
15

The competition concern is that when the non-contestable part of the customer in
question is large compared to the contestable part, the all-unit rebate may allow
the dominant supplier to leverage its power from the non-contestable part to the
contestable part. Indeed, while the dominant supplier can recoup the rebate on its
overall sales including both contestable and non-contestable parts, competing
suppliers will have to recoup the rebate over a smaller base represented by the
contestable part. This all-unit rebate scheme could thus have the effect of
excluding equally efficient rivals from that part of the customers sales that would
otherwise be contestable. This would happen if the rebate scheme means that the
dominant supplier is selling units in the contestable part of demand at an effective
price that does not cover the costs of supplying them.
When implementing the test for a single product rebate the Discussion Paper
specifies that the relevant cost standard is to compare incremental revenues to
average total costs (ATC).
A simple numerical example will make the leverage mechanism clear. Suppose
that Customer A will always buy 100 units that are available only from the
dominant supplier, so the assured base or the non-contestable share is 100 units.
But the customers total demand is for 200 units, and the remaining 100 units
could be satisfied by products sold by either the dominant supplier or one of its
competitors. Thus the commercially viable share, or contestable share, is 100
units. The ATC is $ 1 per unit.
The dominant supplier offers the following pricing scheme. The customer pays $
2 per unit if they buy any quantity less than 200 units. But if they buy 200 units
they are given a rebate worth $ 120 in total, or $ 0.6 for each of the 200 units
bought in total. To determine whether there is a suction effect, the Discussion
Paper required the calculation of the effective price for the units that belong to the
contestable share and see whether this price is inferior to the dominants supplier
ATC.
Price per unit = $ 2 before rebate

Price per unit = $ 2 0.6 = $ 1.4 after rebate
Commercially viable amount (contestable share) = 100 units
With rebate: 200 x $ 1.6 = $ 280
16

Without rebate: 100 x $ 2 = $ 200
The difference of 80 is what is paid for the last 100 contestable units
The effective price (Pe) over the last 100 = $ 80 / 100 = $ 0.8
As Pe < ATC, the rebate creates a suction effect
If the effective price is above ATC, the European Commission considers that it is
unlikely to have foreclosure effects. Indeed, the European Commission has
considered that in some exceptional circumstances, pricing above ATC could be
predatory. This includes cases of collective dominance where collectively
dominant companies apply a clear strategy to collectively exclude or discipline a
competitor by selectively undercutting the competitor and thereby putting pressure
on its margins, while collectively sharing the loss of revenues. 35 It also include
the situation where a single dominant company operates in a market where it has
certain non-replicable advantages or where economies of scale are very important
and entrants necessarily will have to operate for an initial period at a significant
cost disadvantage because entry can practically only take place below the
minimum efficient scale. 36 .
If the effective price is below ATC, the European Commission will examine
whether there are other factors point to the conclusion that entry or expansion by
as efficient competitors is likely to be affected. In this context, it will review the
market coverage of the rebate, whether there has been aggressive and significant
entry and/or expansion by competitors and/or switching competitors etc. Where
European Commission concludes that the rebate is capable of foreclosing as
efficient competitors, it will examine whether the rebate can be objectively
justified; and/or generates pro-competitive efficiencies.
b) Framework of analysis of conditional all-unit rebates under the 2008
Contribution
In the 2008 Contribution, when assessing the legality of conditional all-unit
rebates (or retroactive rebates), the European Commission continues to use a
suction effect test to determine the effective price. Regrettably, the European
Commission gives only very general indication as to the determination of the size
of the contestable share (so-called relevant range in the 2008 Contribution).
Thus, it notes that If customers are likely to be willing and able to switch large
amounts of demand to a (potential) rival relatively quickly, the relevant range is
likely to be relatively large. If on the other hand customers are likely only to want
or be able to switch small amounts incrementally, then the relevant range will be
relatively small. 37
35
36
37
Discussion Paper, 128

Idem. 129.
17

Once the effective price is calculated, the European Commission compares this
price with the dominant undertakings costs. Like for incremental rebates, the
European Commission uses LRAIC as the relevant cost benchmark. As
previously noted, this constitutes an evolution from the Discussion Paper, where
the European Commission applied the ATC cost benchmark.
PRESUMPTIONS AND SAFE HARBORS
7. Are there circumstances under which loyalty discounts or rebates are
presumed illegal? Yes/No If yes, please explain, including whether the
presumption is rebuttable and, if so, what must be shown to rebut the
presumption.
Under the current standards set by the case law of the Community Courts (British
Airways), loyalty rebates conditioned upon exclusivity are illegal as they are
deemed to have a foreclosure effect. It should be noted that under the Discussion
Paper and the 2008 Contribution, such rebates are not presumed illegal and they
will be examined under the framework applicable to conditional rebates.
On the other hand, under the Discussion Paper and the 2008 Contribution, where
the effective price of the rebate is below the dominant firms AAC, as a general
rule the European Commission will presume that the rebate has a foreclosure
effect. The dominant undertaking may rebut this presumption by demonstrating
that the rebate can be objectively justified; and/or generates pro-competitive
efficiencies. However, the European Commission considers that it is unlikely that
such a defense is able to succeed.
8. Has your jurisdiction developed any safe harbors governing loyalty discounts
or rebates? Yes/No. If yes, please explain the terms of the safe harbor.
The European Commission has not developed clear safe-harbors with regard to
loyalty discounts and rebates. As explained in our answers to Question 6, if the
effective price of a loyalty rebate (such as an all-unit rebate) is above ATC,
according to the Discussion Paper, the European Commission states that it is
unlikely to conclude there is foreclosure. It further states that under exceptional
circumstances, such as when the dominant firm has non-replicable advantages, the
European Commission may conclude that, even though the effective price above
ATC, the rebate in question may create foreclosure. The implication is that
dominant firms granting rebates can draw no comfort from this statement. Even
when their effective price is above ATC, they might still be challenged by the
European Commission.
18

JUSTIFICATIONS AND DEFENSES
9. What types of justifications and defenses, if any, are available to the
dominant firm (e.g., efficiencies, meeting competition)? Please specify the
role they play in the competitive analysis and who bears the burden of proof.
In case a rebate is likely to have an appreciable foreclosure effect, an objective
justification and efficiencies defense is available to the dominant undertaking.
The company has the burden of proof of these objective justifications and
efficiency considerations.
For this defence, the dominant undertaking must demonstrate that the following
conditions are fulfilled:
i) That efficiencies are realised or likely to be realised as a result of the conduct
concerned;
ii) That the conduct concerned is indispensable to realise these efficiencies;
iii) That the efficiencies benefit consumers; and
iv) That competition in respect of a substantial part of the products concerned is
not eliminated. 38
For instance, the dominant firm adduces evidence that the rebate is indispensable
to obtain cost advantages and pass them on to the customers. Another example of
justification could be that the rebate system is indispensable to incite the
customers to purchase and resell a higher volume and avoid double
marginalisation. A third example could be that the rebate system or the single
branding obligation is indispensable to provide the incentive for the dominant
supplier to make certain relationship-specific investments in order to be able to
supply a particular customer. 39 The Discussion Paper notes that Meeting
competition can in general not be used as a justification for single branding
obligations. 40
POLICY
10. What policy considerations does your jurisdiction consider with respect to
loyalty discounts and rebates?
You may wish to address the following sorts of issues: Are loyalty discounts and
rebates common? Does your jurisdiction generally consider them to be procompetitive? Does your answer depend on whether the firm offering the
discounts is dominant? Does your jurisdiction view loyalty discounts and
rebates by a dominant firm as generally anticompetitive? What competitive
38
39
40
Discussion Paper, 84.

Idem. 173 to 175.
Idem. 176.
19

concern(s), if any, are generally associated with loyalty discounts and rebates in
your jurisdiction?
As explained in our answer to Question 1, rebates only raise antitrust concerns if
they are granted by dominant companies and if they exclude from the market as
efficient competitors. As a result, rebates are analysed under Article 82 EC.
The European Commission has recognized that rebates granted by dominant
companies are instruments of healthy and legitimate price competition and that
such firms should in principle be allowed and encouraged to share their profits
[to customers] by offering discounts and rebates. 41 The European Commission
is ready to consider that where the rebate is a direct reflection of the dominant
companys efficiency, it is unobjectionable. 42
Rebates raise antitrust concerns where they are likely to exclude competitors (see
the case law and the decisional practice cited at Questions 2 and 3 which all refer
to cases of exclusionary abuses).
Rebates can also lead to discriminatory abuses where they are granted only to
some customers without any objective justification (such as the volume of
business or by economies of scale they allow to make) and where they give these
customers an economic advantage over similarly situated competitors (who thus
find themselves at a competitive disadvantage because they do not receive the
rebates). 43
11.
Please provide any additional comments on your experience with loyalty

discounts and rebates. You may wish to address whether there are
significant policy and/or practical considerations that may lead to greater
or lesser agency enforcement against loyalty discounts and rebates
pursuant to your unilateral conduct rules, e.g., concern with the risks of
false positives/false negatives and/or the presence or lack of evidence of
consumer harm.
We believe that the following policy consideration should be applied when
assessing the legality of loyalty rebates:
1) As a general policy, competition authorities should not adopt a per se illegality
approach towards loyalty rebates. The legality of loyalty rebates should be
exclusively assessed on the basis of an effects-based approached using objective
economic criteria and a price-cost test;
2) The suction test presented in the Discussion Paper should be abandoned. A
standard predatory-pricing approach towards all loyalty rebates should be applied;
3) When applying the price-cost test, the AAC should be used as the proper cost
standard; and
41
42
43
Idem. 3.
Case C-163/99, Portugal v. EC Commission [2001] ECR I-2613, 52.
20

4) Clear safe-harbors should be defined with regard to loyalty rebates.
We review each of these proposals in turn.
1) General policy towards loyalty rebates
As a general policy, competition authorities should not consider that loyalty
rebates result in harmful foreclosure. On the contrary, they should recognize that
dominant firms do not generally grant loyalty rebates to exclude competitors.
Dominant firms, like non-dominant firms, resort to various types of rebates to
increase their sales with resulting efficiencies, such as the realization of
economies of scale, the faster recovery of fixed costs, etc. In fact, loyalty rebates
realize valuable efficiencies and allow firms to grant beneficial discounts. 44
Moreover, rebates primarily ensure price competition, which is the very behavior
antitrust laws should seek to encourage and protect. Therefore, whilst it is true
that, in certain circumstances, loyalty rebates may be granted for exclusionary
purposes, this is the exception rather than the rule.
For this reason, there is no reason for competition authorities to take a policy of
per se prohibition towards loyalty rebates by presuming that a given form of
loyalty rebates always produces anti-competitive effects. Indeed, while a per se
rule may be justified with respect to certain practices, such as, for instance,
cartels, such a clear cut anti-competitive story is not present in the case of loyalty
rebates. 45 In addition, we consider that the issue of whether or not loyalty rebates
are anti-competitive should not depend on the form of such rebates. What matters
is whether the rebates in question produce foreclosure effects. There is therefore
no reason to believe that, for instance, rebates, for which the threshold in
expressed in terms of a percentage of the customers requirements, are in essence
more likely to have foreclosure effects than where the threshold expressed in
volume.
We consider that the legality of loyalty rebates should instead be exclusively
assessed on the basis of an effects-based approached supported by objective
economic criteria. In this respect, a price-cost test must play a central role as a
screening device to determine whether the rebate has the ability to foreclose a
dominant firms rivals to supply one or several customers. In this respect, and in
line with the Discussion Paper, the price-cost test should always rely on the
equally efficient competitor standard.
Finally, the price-cost test should be part of a broader economic assessment to
determine whether the loyalty rebates substantially foreclose the market and, in
such cases, whether the foreclosure effect can be objectively justified and/or
compensated by efficiencies. While the price-cost test helps determining whether
the rebates granted can have the effect of foreclosing competitors because the
44
45
See Selective Price Cuts and Fidelity Rebates, Economic Discussion Paper, July 2005,
OFT804 (the OFT report), 2.29 where the OFT states Theory does not suggest that
dominant firms would usually use discount schemes to harm competition., a requirement
that discounts must be justified [in order not to be considered anti-competitive] could chill
price competition where firms are discouraged from employing beneficial discounts due to the
burden of having to justify them to the authorities.
See OFT Report, at 2.9 et seq.
21

dominant firms customers cannot turn to alternative suppliers without incurring
substantial switching costs, it should also be demonstrated that these customers
represent a substantial share of the market to which equally efficient rivals can
turn, depriving them of the possibility to profitably enter and/or expand. Thus,
where competitors can have access to a sufficient share of the demand for the
products/services in question to allow them to profitably enter or remain on the
market, the dominant firm remains constrain by its competitors and its rebates
cannot be anticompetitive.
2) The suction effect test applied to all-unit rebates should be abandoned in
favor of a standard predatory-pricing approach towards all loyalty
rebates
As explained in Question 6 of this Questionnaire, the European Commission
currently applies a suction effect test to screen the legality of all-unit rebates. We
consider that this test is uncertain, impracticable and likely to lead to serious
mistakes.
First, the numerical example presented in Question 6, which is in line with the
European Commissions own example in the Discussion Paper, is highly
simplified and relies on a number of assumptions. 46 It is thus not clear how the
suction effect would play out in real world markets where some of these
assumptions do not hold.
Second, a significant difficulty raised by the suction effect test relates to the
determination of the size of the contestable share of a given customers demand.
This has been recognized by the OFT in its submission to the OECD Roundtable
on rebates. 47 The suction effect test relies on the assumption that the dominant
supplier controls a part of the demand of the customer to which it gives a rebate,
which will be its assured base. It also assumes that this assured base (and thus the
non-contestable part of the customers demand) is large (as otherwise, the
dominant firm would not be able to leverage its control of the non-contestable part
to the contestable part). The problem is that it is extremely difficult to determine
in practice whether and, if so, the extent to which the demand of a given
customer is contestable. The size of the contestable share will depend on several
factors such as switching costs, whether the products concerned are Must-Have
brands (or must-stock products) and upon capacity constraints. The problem is
that these different factors, and their relative importance for a given
product/service and/or a given customer, are notoriously hard to measure.
An additional layer of complexity comes from the fact that a proper analysis of the
contestability of a given customers demand requires a review of the
counterstrategies that the dominant firms rivals can use to overcome some of the
handicaps preventing them from supplying the customers of the dominant firm.
For instance, when faced with capacity constraints, a dominant firms rival may
decide to concentrate all its supplies on one or a limited number of customers or,
46
47
For instance, the threshold is set at a threshold above the level that the buyer would purchase
from the dominant company in the absence of any loyalty enhancing obligation or rebate, the
non contestable share is larger than the contestable share, the respective size of these shares do
not fluctuate, etc.
United Kingdom, Roundtable on Bundled and Loyalty Discounts and Rebates,
DAF/COMP/WP3/WD(2008)46, 10 June 2008 at 38.
22

if output needs to be increased, subcontract the manufacturing of its products to
other producers.
Given the extreme difficulty of measuring the size of the contestable share of a
given customers demand and the resulting risks of mistakes when engaging in
such measurement, we consider that any price-cost test which relies on the
determination of the size of the contestable share to calculate the effective price
should be absolutely avoided. 48
As an alternative approach, we believe that EC competition law should apply a
standard predatory-pricing test to all types of loyalty rebates, including all-unit
rebates and independently of whether their thresholds are expressed in percentage
of the customers total requirements or in terms of volume. More precisely, a
loyalty rebate should only be anticompetitive where it brings the total price of all
units sold to a customer below an appropriate measure of cost. 49
This approach has been already been adopted in the United States (U.S.), where
loyalty rebates are not considered anticompetitive unless proved predatory. Thus,
in its recent 2008 report on Single-Firm Conduct Under Section 2 of the Sherman
Act, the DOJ states that:
The standard predatory-pricing approach to single-product loyalty discounts has a
number of advantages. Compared to other possible approaches [], a predatorypricing rule would be relatively easy for courts and enforcers to administer and would
provide business with the clarity necessary to conform their conduct to the law using
the information available to them. Further, this approach has relatively low risk of
chilling desirable, pro-competitive price competition that immediately benefits
consumers. 50
3) When applying the price-cost test, the AAC should be used as the proper cost
standard
The application of a price-cost test raises the complicated question of the selection
of the appropriate cost standard.
The approach of the European Commission has evolved since its 2005 Discussion
Paper with regard to the selection of the appropriate cost benchmark. Thus, in the
2008 Contribution, the Commission uses the LRAIC cost benchmark instead of
the ATC cost benchmark. 51 This evolution is, however, of limited importance as
48
49
50
51
This has been recognized by the DOJ in its Competition and Monopoly: Single-Firm
Conduct Under Section 2 of the Sherman Act, 2008, available at
www.usdoj.gov/atr/public/reports/236681.htm, (see p .117 where the DOJ states: the
Department believes that an approach requiring courts to determine whether a portion of a
market is uncontestable and to quantify that portion, as well as to analyze whether a discount
deprived the plaintiff of efficient scale, would be difficult to administer. More importantly,
such an approach would not provide much clarity to firms deciding whether to offer discounts
and likely would chill desirable price competition.
U.S. Department of Justice, Competition and Monopoly: Single-Firm Conduct Under
Section 2 of the Sherman Act, 2008, at p.111.
U.S. Department of Justice, Competition and Monopoly: Single-Firm Conduct Under
Section 2 of the Sherman Act, 2008, at p.116.
As noted above, when implementing the test for a single product loyalty rebate, the
Discussion Paper requires a comparison of the dominant firms incremental revenues to its
23

both cost standards will often lead to the same result, although the LRAIC is a less
stringent cost standard than the ATC. 52 The Discussion Paper justifies the use of
a long run cost standard such as ATC (and implicitly LRAIC) by saying that a
company can fund losses on sales in the contestable part of demand through
profits on sales in its assured base, and so can operate a rebate scheme for a long
time. 53
This reasoning, however, fails to convince us. We believe instead, like most legal
and economic scholars, that AAC is the right cost standard. 54
First, as long as competitors cover their AAC, it makes economic sense for the
dominant firm to make the sale as any additional revenue will make a positive
contribution to recovering fixed costs. Accordingly, pricing behaviour whereby a
firm sells part or even all of its output at prices below ATC is widely seen in
competitive markets. Thus, prices below ATC but above AAC are perfectly
rational and should not raise antitrust scrutiny.
Second, the fact that a rebate scheme can be operated for a long time cannot
justify assuming that it will be operated for a long time. Dominant firms may
temporarily price below both ATC and LRAIC for a number of legitimate
reasons, for example because they want to promote a new product through a
relatively low initial entry price (so-called penetration pricing), because there is
a sudden drop in demand, 55 because the company is operating in the early stages
of a market with switching costs and so on. Moreover, whether it is true that a
firm can fund losses on sales in the contestable part of demand through profits on
sales in its assured base, this strategy may nevertheless have a cost that the
dominant firm may not want to carry for a long period of time.
4) Clear safe-harbors should be defined with regard to loyalty rebates.

As noted in our answer to Question 8, the European Commission has
unfortunately not yet defined clear and definitive safe harbors with regard to
loyalty rebates. Thus, even where the effective price is above ATC, the European
Commission only states that it is unlikely that such loyalty rebates have
anticompetitive effects, and reserves itself the right to challenge the rebate in
cases of exceptional circumstances.
52
53
54
55
ATC. In its 2008 Contribution, the European Commission considers that the LRAIC is instead
the applicable cost standard.
In practice the incremental cost of offering a new product might be less than the average total
cost when production of the two shares some facilities or inputs. An example would be if both
products were developed using shared research facilities and if research done to develop one
meant that it was cheaper to develop the other. In cases where the incremental cost of offering
contestable products is lower than the average total cost, a rebate is less likely to be found
abusive, under the tests in the Discussion Paper, where it is characterised as a multi-product
rebate rather than a single product rebate
See, e.g. Ahlborn and Bailey, supra note 17, at 140; Simon Bishop and Philip Marsden,
Editorial - The Article 82 Discussion Paper: A Missed Opportunity, April 2006, European
Competition Journal, 1-7 at p.5.
24

We believe that this approach is regrettable since it leaves dominant firms in a
situation of uncertainty and result in the chilling of competition.
We consider on the contrary that competition authorities (and courts) should
provide safe harbors designed to provide firms with immediate assurance, without
the need to invest significant resources in a full-scale competitive analysis, that a
given rebate regime will not be challenged by a competition authority or, more
generally, create antitrust liability.
In a complex field like rebates, the difficulty is of course to agree on what such
safe harbors should be. Like in the U.S., 56 we suggest that loyalty rebates should
be evaluated under a standard predatory-pricing approach as described in Question
6 and that the result of this price-cost test should be used as a safe harbor rather
than simply as one of the steps in the assessment of a given rebate by a
competition authority or a court.
56
In the US, federal courts and the DOJ have made abundantly clear that single-product rebates
will not be subject to antitrust liability when the effective price is above AVC. See U.S.
Department of Justice, Competition and Monopoly: Single-Firm Conduct Under Section 2 of
the Sherman Act, 2008, available at www.usdoj.gov/atr/public/reports/236681.htm
25

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Prof.

Single-Product Loyalty Discounts and Rebates

Prof. Damien Geradin

Intel (MEMO/07/314, 27.07.2007 and MEMO/08/517, 17.07.2008): no

Case COMP/38.113 Prokent/Tomra, 29 March 2006: Case initiated

Euronext (see Report on Competition Policy 2005): no information on

COMP/39.116 Coca-Cola [2005] OJ L 253/21: no information on who

COMP/37.409 Interbrew (Press release IP/04/574, 30.4.2004): Case

COMP/33.133-C Soda Ash Solvay [2003] OJ L10/10 and

COMP/E-2/36.041/PO Michelin II [2002] OJ L143/1: Case opened on

COMP/35.141 Deutsche Post (I) [2001] OJ L 125/27. Case opened

COMP/36.915 Deutsche Post (II) [2001] OJ L 331/40. Case opened

Case IV/D-2/34.780 Virgin/British Airways [2000] OJ L30/1: Case

Case IV/35.703 Portuguese airports [1999] OJ L 69/31: Case opened

Prof. Damien Geradin

1. Cases of exclusionary rebates which have not been appealed to the

(b) Deutsche Post (I)

Prof. Damien Geradin

Prof. Damien Geradin

(3) Cases of exclusionary rebates which have been appealed to the

Prof. Damien Geradin

Prof. Damien Geradin

4. Does your jurisdiction allow private parties to challenge loyalty discounts

In a nutshell, Article 86 EC addresses the issue of the application of EC competition law to

Prof. Damien Geradin

See Case 85/76, Hoffman-La Roche v. Commission [1979] ECR 461.

Prof. Damien Geradin

Prof. Damien Geradin

Whether the rebate produces likely or actual exclusionary effects in that

(ii) Whether the

Prof. Damien Geradin

Measures of market performance which are considered signs of a

Prof. Damien Geradin

whether the rebate can be objectively justified; and/or

the rebate generates pro-competitive efficiencies. 24

b. Does intent play a role, and if so what role and how is it

c. Does price-cost comparison play a role? If so, please describe the

Prof. Damien Geradin

European Commission, Roundtable on Bundled and Loyalty Discounts and Rebates;

Prof. Damien Geradin

2) Conditional Incremental rebates

Framework of analysis for conditional incremental rebates under the

Prof. Damien Geradin

2008 Contribution, 18.

Prof. Damien Geradin

Price per unit = $ 2 before rebate

Prof. Damien Geradin

Discussion Paper, 128

Prof. Damien Geradin

Prof. Damien Geradin

Discussion Paper, 84.

Prof. Damien Geradin

Please provide any additional comments on your experience with loyalty

Prof. Damien Geradin

Prof. Damien Geradin

Prof. Damien Geradin

Prof. Damien Geradin

4) Clear safe-harbors should be defined with regard to loyalty rebates.

Prof. Damien Geradin

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