Bargaining Over Loyalty

Contracts between suppliers and customers frequently contain provisions rewarding the customer for exhibiting loyalty to the seller. For example, suppliers may offer customers preferential pricing for buying a specified percentage of their requirements from the supplier or buying minimum numbers of products across multiple product lines. Such loyalty-inducing contracts have come under attack on antitrust grounds because of their potential to foreclose competitors or soften competition by enabling tacit collusion among suppliers. This Article defends loyalty inducement as a commercial practice. Although it can be anticompetitive under some circumstances, rewarding loyal customers is usually procompetitive and price reducing. The two most severe attacks on loyalty discounting-that loyalty discounts are often disguised disloyalty penalties and that loyalty clauses soften competition-are unlikely to hold as a general matter. Nor are arguments that customers only accede to loyalty inducements because of collective action problems generally true. Dominant buyers who face few collective action problems frequently use loyalty commitments to leverage their buying power and obtain lower prices.These kinds of agreements allow firms to reward their most loyal customers. Rewarding customer loyalty promotes competition on the merits.1IntroductionLoyalty has an unambiguously positive connotation in ordinary discourse and in most legal fields.2 For example, ethical canons require attorneys to remain faithful to their clients;3 trustees and board members owe fiduciary duties to beneficiaries and shareholders;4 spouses enjoy testimonial privileges based on social conventions respecting marital loyalty;5 adultery remains criminalized in most states and a felony in some;6 democratic theory requires judges to remain faithful to the will of the people expressed in constitutions or statutes;7 and the law metes out far greater, harsher punishment on the traitor than the common enemy.8 George Fletcher has observed that "[sjome of the strongest moral epithets in the English language are reserved for the weak who cannot meet the threshold of loyalty: They commit adultery, betrayal, treason."9 Reflecting venomous disapprobation of treachery, Dante placed the traitors Brutus, Cassius, and Judas Iscariot in Lucifer's jaws in Hell's ninth circle.10 In most contexts, loyalty only becomes difficult ethically and morally when loyalty obligations collide-when loyalty to one person means disloyalty to another.11Antitrust law is exceptional-loyalty receives a far less congenial welcome. Antitrust values rivalry between competing sellers, which implies an opportunity to steal business from the rival. Customer loyalty obstructs this hydraulic action. Particularly troubling are inducements to loyalty offered by firms with market power. When dominant sellers offer customers incentives to remain loyal to the seller, these loyalty incentives may stifle competition and harm the very customers offered the ostensibly favorable terms. Even if the customer understands the loyalty incentive's exclusionary or collusive potential, she may find it to be in her economic interest to accept the incentive since other customers will be accepting it regardless of her decision. Dominant firms may require their customers to remain loyal for the purpose of starving rivals of sales opportunities, thus ensuring that in the long run there are no other sellers to tempt customers into disloyalty. Or, they may use loyalty incentives to facilitate supracompetitive oligopolistic pricing.Loyalty or fidelity incentives have recently been challenged under the antitrust laws in the United States and the European Union. For example, parallel cases in the U.S. and EU against British Airways and Intel challenged those dominant firms' practices of incentivizing customers- travel agents or computer manufacturers-to remain loyal to British Airways or Intel at the expense of smaller rivals, Virgin Atlantic and AMD. …