Source: https://www.justice.gov/atr/competition-and-monopoly-single-firm-conduct-under-section-2-sherman-act-chapter-6
Timestamp: 2019-04-21 14:27:20+00:00

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This chapter explores whether appropriate standards for analyzing bundled discounting by a monopolist are now more discernable. It examines the case law and the potential anticompetitive and procompetitive effects of bundled discounting. The chapter also discusses ways to analyze bundled discounting under section 2, including whether there are appropriate safe harbors that can be used in that analysis.
Relatively few decisions address the legality of bundled discounting under section 2. As discussed below, most, but not all, courts that have considered the issue employ some type of a cost-based test to determine if the price of the bundle is below some measure of costs, but no consensus exists regarding the particular form of that test.
Commentators and panelists recognize the ubiquity of bundled discounting and the benefits that can flow from it. But they also agree that, under certain circumstances, a monopolist's bundled discounting can potentially harm consumers.(53) However, there is no consensus among courts or commentators on the appropriate analysis of such potential harm.(54) This part of the chapter discusses the two principal theories of competitive harm from bundled discounting by a monopolist, the potential procompetitive benefits of bundled discounting, and a framework for analyzing bundled discounts under section 2, including potential safe harbors.
One theory of harm from bundled discounts is similar to the theory of harm from price predation of a single product and applies where bundle-to-bundle competition is reasonably possible--whether because an individual competitor can provide all the products in the bundle, multiple competitors can team together to provide their own bundle, or sophisticated customers can assemble their own bundles. The primary difference is that with bundling there are multiple products, in contrast to one product in the predatory-pricing context. In either case, the below-cost pricing may force competitors to exit the market, after which a firm potentially could charge supracompetitive prices. Without below-cost pricing, equally efficient competitors would be able to match the bundled price, and competition would not be harmed.
A second theory of competitive harm may apply when no rival can offer a competing bundle. In the simplest case, Firm A has a monopoly in Product X and bundles X with Product Y, at a discount. Firm B only sells Product Y, and no one other than Firm A sells X. In this situation, Firm A's bundled discounting can have anticompetitive effects similar to those flowing from some anticompetitive ties. Specifically, it may allow Firm A to use its monopoly power in X to obtain a second monopoly in Y, or it may assist Firm A in maintaining its monopoly in X.
The tying theory of bundled-discounting harm can further be illustrated with a hypothetical from the Ortho opinion.(55) The hypothetical assumes that only A makes conditioner, that both A and B make shampoo, and that consumers must use both products. A's average variable costs are $2.50 for conditioner and $1.50 for shampoo, while B's average variable cost for shampoo is $1.25. A prices conditioner and shampoo at $5 and $3 if bought separately, but offers a bundled price of $5.25 if the products are bought as a package. This is above A's average variable cost of $4 for both products. However, in order for B to compete for shampoo sales, it must persuade the customer to buy its shampoo while paying the unbundled price of $5 for A's conditioner; this means that B can charge no more than $0.25 for shampoo, which is below both A's average variable cost for shampoo and B's own lower average variable cost.
The harm to the competitive process in this hypothetical does not come about in the same way as it does with predatory pricing, because A is not charging a price--either for the goods that make up the bundle or for the bundle itself--that is less than its average variable cost for both products. Rather, the structure and level of A's prices result in all or most purchasers buying both products from Firm A, because the price of the bundle is lower than the prices customers would have to pay to acquire the bundled goods outside the bundle. Because the anticompetitive potential of such conduct does not arise from the monopolist charging below-cost prices, but from linking the two products, the impact of the conduct described in the hypothetical resembles that of tying more than that of predatory pricing.
However, other panelists questioned whether the frequency of such illusory discounts is sufficient to shape legal rules.(72) In particular, one panelist questioned both the likelihood of fictitious discounts and the ability to distinguish them from the more typical bundled discounts that do provide customers the benefit of lower prices.(73) Product attributes may have changed,(74) or prices may have moved for a variety of supply and demand conditions independent of the bundling or just because a firm with monopoly power decides it was not charging the correct monopoly price.
The Department believes that sound, administrable rules for bundled discounting by a monopolist would be valuable and that screens or safe harbors have the potential to provide more certainty in this area without harming antitrust enforcement. Two different price-cost safe harbors for bundled discounting have been the subject of the majority of the commentary and discussion: the total-bundle predation-based (or aggregate or Brooke Group) safe harbor and the discount-allocation (or Ortho or AMC) safe harbor. We turn to them now.
As is evident from the above discussion, bundled discounts share characteristics of both predatory pricing and tying. Professor Hovenkamp suggests that they "are best analyzed by a model that draws a little from each area."(102) The Department agrees and sets forth below two safe harbors for bundled discounts, one applicable to a predation theory and one applicable to a tying theory.
The Department believes that where bundle-to-bundle competition is reasonably possible, the potential competitive harm of bundled discounting mirrors that of predatory pricing. The price-cost safe harbor in this instance should therefore mirror the predatory-pricing safe harbor: the bundled discount should be lawful if the price of the bundle is not below an appropriate measure of cost of the bundle.(103) In addition, as in ordinary predatory-pricing analysis, a showing that recoupment is likely should be required.
The Department believes that where bundle-to-bundle competition is reasonably possible, the potential competitive harm of bundled discounting mirrors that of predatory pricing. The price-cost safe harbor in this instance should therefore mirror the predatory-pricing safe harbor.
Where bundle-to-bundle competition is not reasonably possible, the Department believes that a discount-allocation safe harbor is appropriate.
An often overlooked concern with adopting any safe harbor is that conduct falling outside the safe harbor might inappropriately give rise to a negative presumption about the conduct.(106) Several panelists observed that bundled discounts can exclude equally efficient competitors while increasing consumer welfare.(107) One panelist cautioned that where defendant fell outside a price-cost safe harbor, "you would still want some sensible explanation of how this gives the defendant power over price, how prices go up as a result."(108) A safe harbor can be counterproductive if businesses or courts assume improperly that failing to come within it creates a presumption of anticompetitive conduct.
A safe harbor can be counterproductive if businesses or courts assume improperly that failing to come within it creates a presumption of anticompetitive conduct.
The third prong of the AMC's three-pronged test(110) requires plaintiff to show that "the bundled discount or rebate program has had or is likely to have an adverse effect on competition."(111) The AMC Report does not describe how an actual or likely adverse effect on competition would be shown. An amicus brief filed in PeaceHealth signed by, among others, two AMC Commissioners, purports to describe the analysis under the AMC's third prong as a rule-of-reason analysis, stating that courts would determine whether the pricing practice, net of efficiencies it may create, is likely to increase prices, reduce output, or otherwise impair competition substantially in a relevant market. Under this approach, the impact on rivals must be found to be so substantial, and the ability of others to enter or expand so limited, that rivals can no longer operate as a meaningful constraint on defendant's monopoly power.(112) The brief does not provide further detail as to exactly what a plaintiff would have to show to establish this part of its case under the AMC's test.
The Department believes that where bundle-to-bundle competition is not reasonably possible, bundled discounting outside the safe harbor should not be presumed anticompetitive. Rather, plaintiff must demonstrate actual or probable harm to competition. A significant consideration in this regard is whether rivals remain and are likely to remain in the market. Rivals' continued presence in the market casts serious doubt on the existence of anticompetitive effects--consumers continue to benefit from the bundled discounting as well as rivals' presence.(129) Accordingly, the Department believes that if rivals have not exited the market as a result of the bundled discounting and if exit is not reasonably imminent, courts should be especially demanding as to the showing of harm to competition.
Further, the Department believes that, when actual or probable harm to competition is shown, bundled discounting by a monopolist that falls outside the discount-allocation safe harbor should be illegal only when (1) it has no procompetitive benefits, or (2) if there are procompetitive benefits, the discount produces harms substantially disproportionate to those benefits. This standard requires plaintiffs to show that the anticompetitive harms of a monopolist's bundled discounting substantially outweigh its procompetitive benefits in those instances in which there are both anticompetitive effects and non-exclusionary explanations for the conduct. The Department does not believe that a trivial benefit should outweigh substantial anticompetitive effects.
The Department believes that, when actual or probable harm to competition is shown, bundled discounting by a monopolist that falls outside the discount-allocation safe harbor should be illegal only when (1) it has no procompetitive benefits, or (2) if there are procompetitive benefits, the discount produces harms substantially disproportionate to those benefits.
A monopolist's bundled discounts or rebates may, in certain circumstances, produce anticompetitive effects. At the same time, however, overly broad prohibitions against bundled discounting may inhibit pricing practices that benefit consumers. Clear and administrable standards are needed to enable firms to know in advance if bundled discounting may subject them to antitrust liability.
The Department believes that the development of clear, administrable standards for analyzing bundled discounts would be furthered by use of an appropriate price-cost safe harbor. The particular price-cost safe harbor that should be used depends on whether bundle-to-bundle competition is reasonably possible. If it is, the potential competitive harm of bundled discounting mirrors that caused by predatory pricing, so the appropriate price-cost safe harbor should look to whether the discounted price of the entire bundle exceeds an appropriate measure of cost of all the products constituting the bundle. For pricing outside this safe harbor, a plaintiff should have to show harm to competition sufficient to establish a likelihood of recoupment.
Where bundle-to-bundle competition is not reasonably possible, the potential competitive harm more closely resembles the harm that can arise from tying. Such harm may occur where the bundled discounting would cause customers to purchase the monopolist's bundle instead of buying only the monopoly product from the monopolist and purchasing the competitive product from an equally efficient competitor. The discount-allocation safe harbor is an appropriate screen for determining whether those consequences are possible. The discount-allocation safe harbor compares an appropriate measure of defendant's cost for the competitive product (or products) in a bundle to the imputed price of that product (or products), which is the price after allocating all discounts and rebates attributable to the entire bundle to the competitive product (or products).
If the conduct falls outside the discount-allocation safe harbor, further analysis is required. Failure to come within the safe harbor should not create a presumption of anticompetitive effects. Where bundle-to-bundle competition is not reasonably possible, bundled discounting should only be condemned with an adequate showing of actual or probable harm to competition. A significant factor in this regard is whether rivals remain or are likely to remain in the market and, if so, whether the bundling significantly increases their marginal costs. Further, the Department believes that a proven procompetitive explanation for such a bundled discount should defeat a section 2 challenge to the bundled discount unless the anticompetitive harms are substantially disproportionate to the benefits.
Although there is general agreement that a monopolist's above cost (on all units) single-product loyalty discounts can be anticompetitive, there is no consensus on how likely that is. Further, there are questions as to how a court or enforcer should go about determining whether a particular single-product loyalty discount is anticompetitive, as well as how a business deciding whether to offer such a discount can know at the time whether the discount might later be deemed illegal. One question is whether the focus should be on whether the dominant firm is covering the cost of producing all units sold to a customer or on covering the cost of the additional sales induced by the discount. Another question is at what level are the quantities of sales induced by the practice likely to have significant anticompetitive effect.
These issues, as well as concerns common to all types of single-firm conduct, including the need to develop administrable rules that appropriately balance the risk of false positives and false negatives, are reflected in the relatively limited case law and commentary on single-product loyalty discounts and in the views expressed by panelists. This chapter discusses these cases and perspectives and presents the Department's current thinking on how single-product loyalty discounts should be analyzed.
As with bundled discounting, no single-product loyalty discount antitrust case has yet reached the Supreme Court. The three appellate decisions addressing this practice emphasize the importance of factual evidence of an anticompetitive effect (rather than simply of an effect on a competitor) and the substantial judicial concern about deterring beneficial price cuts.
Although plaintiff lost each of these three appellate cases, private litigants continue to challenge single-product loyalty discounts. In Masimo Corp. v. Tyco Health Care Group, L.P.,(164) the district court sustained the jury's verdict that market-share discounts and sole-source arrangements violated the antitrust laws and ordered a new trial on damages.(165) Tyco had offered hospitals increased discounts on the purchase of pulse oximetry sensors in exchange for commitments to buy a greater percentage of their oximetry needs from Tyco. A typical offer involved 40 percent off all sensors if the hospital bought 90 percent or more of its requirements from Tyco, and a 16 to 18 percent discount if less than 90 percent.(166) Masimo argued that the possible loss of Tyco's maximum discounts on all of a hospital's sensor purchases functioned as a penalty, forcing hospitals to deal exclusively with Tyco.(167) The court held that the jury reasonably could have concluded that the market-share discounts "were designed to and did maintain monopoly power" in violation of section 2(168) and constituted illegal exclusive dealing in violation of section 1 and section 3 of the Clayton Act.(169) The court did not analyze or discuss whether Tyco's prices were above any relevant measure of its costs.
In the absence of a Supreme Court decision in a single-product loyalty discount case, it is difficult to discern the precise legal standard that a particular court will apply. Nonetheless, most of the handful of lower court decisions analyzing these discounts have applied some type of price-cost test.
Compared to the voluminous legal and economic commentary analyzing bundled discounting (and other unilateral conduct, such as predatory pricing and tying), there has been relatively little commentary regarding single-product loyalty discounts. Those who have commented on this subject generally agree that these discounts are most often procompetitive: for example, a manufacturer may use these discounts to induce services from distributors or retailers(176) or "to compete for the most desirable customers."(177) There is also agreement that, as with standard predatory pricing, these discounts can be anticompetitive where they bring the total price on all units sold to a customer below an appropriate measure of cost and there is the likelihood of recoupment.
While commentators agree that single-product loyalty discounts are most often procompetitive, they also agree that these discounts can be anticompetitive where they bring the total price on all units sold below an appropriate measure of cost and there is a likelihood of recoupment.
Some panelists and commentators believe that single-product loyalty discounts, under certain circumstances, can be anticompetitive, even where the resulting price on all units sold is above an appropriate measure of cost.
However, some panelists were critical of the predatory-pricing approach. As described below, a number of panelists and commentators expressed concern that this approach would fail to identify instances of anticompetitive foreclosure.
Some panelists and commentators have suggested that single-product loyalty discounts can be anticompetitive where customers must buy a certain percentage of their needs from the monopolist and the discount is structured so as to induce them to buy all or nearly all needs beyond that uncontestable percentage from the monopolist as well.
The Department believes that the standard predatory-pricing approach to single-product loyalty discounts has a number of advantages. Compared to other possible approaches described above, a predatory-pricing rule would be relatively easy for courts and enforcers to administer and would provide businesses with the clarity necessary to conform their conduct to the law using information available to them. Further, this approach has a relatively low risk of chilling desirable, procompetitive price competition that immediately benefits consumers. The Department likely would apply a standard predatory-pricing test in analyzing most single-product loyalty discounts. However, in light of views from panelists and others suggesting that above-cost single-product loyalty discounts can be structured to have anticompetitive effects under certain circumstances, and the relatively limited case law and commentary on these types of discounts, the Department believes that further assessment of the real-world impact of these discounts is necessary before concluding that standard predatory-pricing analysis is appropriate in all cases.
The Department believes that the standard predatory-pricing approach to single-product loyalty discounts has a number of advantages, including its administrability, clarity, and reduced risk of chilling procompetitive price competition. The Department likely would apply this approach in most cases, but thinks further assessment is necessary before concluding that it is appropriate in all cases.
The Department believes that the competitive effects of any single-product loyalty-discount program should be evaluated carefully before it is condemned under section 2. Situations in which above-cost (on all units) single-product loyalty discounts result in significant foreclosure effects appear to be rare. Theoretical anticompetitive effects appear possible only where some significant portion of the market is uncontestable due to factors external to the parties, most likely end-user demand. 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 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.
The Department emphasizes that, in any situation in which a foreclosure-based approach is used, plaintiff should be required to demonstrate that the discount forecloses a significant amount of the market and harms competition. Further, as with bundled discounting, plaintiff's (and any other rivals') ability to remain in the market should be a significant factor in assessing competitive harm. When harm to competition is implausible, courts should uphold the discount. Also, as with bundled discounting, where plaintiff demonstrates actual or probable harm to competition, a single-product loyalty discount should be illegal only when (1) it has no procompetitive benefits, or (2) if there are procompetitive benefits, the discount produces harms substantially disproportionate to those benefits. The Department does not believe that a trivial benefit should outweigh substantial anticompetitive effects.
The Department emphasizes that, in any situation in which a foreclosure-based approach is used, plaintiff should be required to demonstrate that the discount forecloses a significant amount of the market and harms competition.
1. The offering of discounts or rebates conditioned upon the level or share of purchases of a single product is addressed infra part II. Also, conditioning the sale of one product upon the purchase of another is tying, which is the subject of chapter 5. One of the ways that firms tie is through what economists call "pure bundling," which is selling two or more products together in fixed proportions and not selling any of the products separately. This chapter addresses the situation where the products are available separately as well as in a bundle, a practice economists call "mixed bundling." See generally Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization 321­24 (4th ed. 2005).
2. See, e.g., Sherman Act Section 2 Joint Hearing: Academic Testimony Hr'g Tr. 136, Jan. 31, 2007 (Rubinfeld) (stating that bundled discounting is "quite ubiquitous and often is procompetitive"); Sherman Act Section 2 Joint Hearing: Loyalty Discounts Session Hr'g Tr. 59, Nov. 29, 2006 (Kattan) (stating that "the prevalence" of bundled discounts and discounts having a retroactive feature "by firms that don't have market power and have no hope of excluding competitors would suggest . . . that there is a good possibility that the efficiency explanation for these practices is the dominant one"); id. at 122­23 (Crane) (stating that "bundled discounting is pervasive and has many pro-competitive or competitively neutral reasons" and that the pervasiveness of a practice suggests there are often good explanations for it); Sherman Act Section 2 Joint Hearing: Tying Session Hr'g Tr. 29, Nov. 1, 2006 (Evans) (noting that "when practices are common in pretty competitive markets, . . . there should be a presumption that these practices are procompetitive"); Richard A. Posner, Antitrust Law 253 (2d ed. 2001) ("If the practice is one employed widely in industries that resemble the monopolist's but are competitive, there should be a presumption that the monopolist is entitled to use it as well.").
3. See infra Part I(C)(1). See generally Nov. 29 Hr'g Tr., supra note 2, at 7­23 (Nalebuff); Patrick Greenlee et al., An Antitrust Analysis of Bundled Loyalty Discounts, 26 Int'l J. Indus. Org. 1132 (2008); Barry Nalebuff, Bundling As a Way to Leverage Monopoly (Yale Sch. of Mgmt., Working Paper No. ES-36, 2004) [hereinafter Nalebuff, Bundling]; Barry Nalebuff, Loyalty Rebates (Oct. 29, 2006) (hearing submission); Janusz Ordover & Greg Shaffer, Exclusionary Discounts (Aug. 25, 2006) (hearing submission).
4. See infra Part I(B).
5. 324 F.3d 141 (3d Cir. 2003) (en banc).
6. Brief for the United States as Amicus Curiae at 19, 3M v. LePage's Inc., 542 U.S. 953 (2004) (No. 02-1865), available at http://www.usdoj.gov/atr/cases/f203900/203900.pdf.
7. See, e.g., 3 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 749b2 (Supp. 2007); Daniel A. Crane, Mixed Bundling, Profit Sacrifice, and Consumer Welfare, 55 Emory L.J. 423 (2006); Greenlee et al., supra note 3; Thomas A. Lambert, Evaluating Bundled Discounts, 89 Minn. L. Rev. 1688 (2005); Nalebuff, Bundling, supra note 3; Timothy J. Muris, Antitrust Law & Economics: Exclusionary Behavior and Bundled Discounts (Nov. 29, 2006) (hearing submission). See generally Nov. 29 Hr'g Tr., supra note 2, at 23­40 (Lambert) (describing various tests suggested by commentators).
8. 427 F. Supp. 1089 (E.D. Pa. 1976), aff'd, 575 F.2d 1056 (3d Cir. 1978).
16. 920 F. Supp. 455, 458 (S.D.N.Y. 1996).
20. Id. at 461 (quoting court papers).
22. Id. at 469. While Ortho focused on whether the actual plaintiff was an equally efficient competitor, the Ninth Circuit's decision in Cascade Health Solutions v. PeaceHealth, 515 F.3d 883, 905­08 (9th Cir. 2008), discussed below, concluded that the focus should instead be on whether a hypothetical equally efficient producer of the competitive product could meet the defendant's discount. Commentators similarly criticize focusing on the actual plaintiff's costs, rather than on those of a hypothetical equally efficient competitor. See, e.g., Areeda & Hovenkamp, supra note 7, ¶ 749a, at 241­42; Lambert, supra note 7, at 1729.
23. 920 F. Supp. at 469­70.
24. 69 F. Supp. 2d 571 (S.D.N.Y. 1999), aff'd, 257 F.3d 256 (2d Cir. 2001).
25. Single-product loyalty discounts are discussed infra part II.
26. 69 F. Supp. 2d at 574.
28. Id. at 580 n.8.
30. 324 F.3d 141 (3d Cir. 2003) (en banc).
33. Id. at 157, 160­61.
37. Id. at 168 (quoting trial court).
38. No. CV 02-4770 MRP, 2006 WL 1236666, *14 (C.D. Cal. Mar. 22, 2006).
39. Id. at *13. However, the court also affirmed the jury's finding of liability based on single-product discounts, without applying a price-cost test. See infra Part II.
40. 359 F. Supp. 2d 307 (S.D.N.Y. 2004).
42. No. 1:04 CV 1580, 2006 WL 3022968, *12 (N.D. Ohio Oct. 23, 2006).
43. Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008).
48. 509 U.S. 209 (1993).
49. 127 S. Ct. 1069 (2007).
50. PeaceHealth, 515 F.3d at 901.
51. Id. at 906­10. It is not entirely clear whether the court's standard was for a safe harbor or for liability.
52. See, e.g., Sherman Act Section 2 Joint Hearing: Conduct as Related to Competition Hr'g Tr. 14, May 8, 2007 [hereinafter May 8 Hr'g Tr.] (Rill); id. at 75 (Melamed); Sherman Act Section 2 Joint Hearing: Business Testimony Hr'g Tr. 63­64, 83, Feb. 13, 2007 [hereinafter Feb. 13 Hr'g Tr.] (Stern); Nov. 29 Hr'g Tr., supra note 2, at 167 (Crane).
53. See generally Crane, supra note 7, at 443­47; Daniel L. Rubinfeld, 3M's Bundled Rebates: An Economic Perspective, 72 U. Chi. L. Rev. 243, 252­62 (2005); Greenlee et al., supra note 3, at 15; Nalebuff, Bundling, supra note 3; Muris, supra note 7, at 28­35. But see May 8 Hr'g Tr., supra note 52, at 61 (Muris) ("[E]mpirically we know almost nothing that tells us that there are anticompetitive problems from bundling.").
54. See generally Sherman Act Section 2 Joint Hearing: Section 2 Policy Issues Hr'g Tr. 153­54, May 1, 2007 [hereinafter May 1 Hr'g Tr.] (Jacobson) (describing bundled discounting as having aspects of predatory pricing, tying, and exclusive dealing); Nov. 29 Hr'g Tr., supra note 2, at 75 (Sibley) ("[I]f there is a general legal theory of bundled discounts . . . it is not predatory pricing and it is not always going to be the same as tying either. It is going to be something else, and I don't know what it is."); Areeda & Hovenkamp, supra note 7, ¶ 749b2.
55. 920 F. Supp. 455, 467 (S.D.N.Y 1996).
56. See supra Chapter 5, Part III(B).
57. Areeda & Hovenkamp, supra note 7, ¶ 749b; see also Daniel A. Crane, Multiproduct Discounting: A Myth of Nonprice Predation, 72 U. Chi. L. Rev. 27, 40 (2005) ("Diversified firms may achieve economies of scope or scale, reduce transaction costs or stimulate demand by selling products in a package . . . ." (footnotes omitted)); David S. Evans & Michael Salinger, Why Do Firms Bundle and Tie? Evidence from Competitive Markets and Implications for Tying Law, 22 Yale J. on Reg. 37, 41 (2005) ("Bundling--offering two or more products at a single price--can provide efficiencies such as marginal cost savings, quality improvement, and customer convenience.").
58. Nov. 29 Hr'g Tr., supra note 2, at 111­12 (Muris); see also Crane, supra note 7, at 430­43; Muris, supra note 7, at 3­7.
59. See, e.g., Areeda & Hovenkamp, supra note 7, ¶ 749b2, at 263­64 ("[B]undling may take advantage of the fact that different customers have different demand elasticities for individual goods. By bundling them . . . output can go up . . . and production and distribution costs can decline.").
60. See, e.g., May 8 Hr'g Tr., supra note 52, at 14, 76­77 (Rill); id. at 75­76 (Melamed); id. at 78 (Creighton); May 1 Hr'g Tr., supra note 54, at 18­19 (Kolasky); id. at 19 (Jacobson); id. at 31­32 (Baer); id. at 144­145 (Kolasky); Feb. 13 Hr'g Tr., supra note 52, at 63­64 (Stern); Nov. 29 Hr'g Tr., supra note 2, at 167­68, 170 (Crane). Similarly, the Antitrust Modernization Commission (AMC), before going on to recommend a three-part test for bundled discounts including a price-cost safe harbor, first concluded that "[t]he lack of clear standards regarding bundling . . . may discourage conduct that is procompetitive or competitively neutral and thus may actually harm consumer welfare." Antitrust Modernization Comm'n, Report and Recommendations 94 (2007), available at http://govinfo.library.unt.edu/amc/report_recommendation/amc_final_report.pdf.
61. 324 F.3d 141, 168 (3d Cir. 2003) (en banc) (quoting trial court).
62. See, e.g., May 8 Hr'g Tr., supra note 52, at 60­61 (Pitofsky, Muris); id. at 78 (Creighton); May 1 Hr'g Tr., supra note 54, at 18­19 (Kolasky); Nov. 29 Hr'g Tr., supra note 2, at 86­89 (Lambert, Kattan); id. at 166­68 (Crane); see also Antitrust Modernization Comm'n, supra note 60, at 97 (criticizing the decision as "too vague and therefore . . . likely to chill welfare-enhancing bundled discounts or rebates" (footnote omitted)).
63. See, e.g., Antitrust Modernization Comm'n, supra note 60, at 99­100; Areeda & Hovenkamp, supra note 7, ¶ 749b2, at 252­57; Crane, supra note 7, at 480­84; Muris, supra note 7, 41­60; Carl Shapiro, Exclusionary Conduct: Testimony Before the Antitrust Modernization Commission 18 (Sept. 29, 2005) (unpublished manuscript), available at http://govinfo.library.unt.edu/amc/commission_hearings/pdf/Shapiro_Statement.pdf.
64. See Nov. 29 Hr'g Tr., supra note 2, at 95­99, 185­94. One panelist who stated that defendant's satisfying an appropriate price-cost test would be "pretty convincing" nonetheless suggested that the price-cost test should not necessarily be part of plaintiff's burden. Id. at 186­88 (Tom).
65. Mar. 20, 2007 Order, Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008) (Nos. 05-35627, 05-36153, 05-36202).
66. See, e.g., infra notes 75, 83 and accompanying text.
67. 515 F.3d 883, 909­10 (9th Cir. 2008).
68. Brief of Amici Curiae American Antitrust Institute, Consumer Federation of America and Consumers Union Supporting McKenzie-Williamette and Affirmance at 21, Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008) (Nos. 05-36153, 05-36202); see also id. at 24.
69. May 1 Hr'g Tr., supra note 54, at 142­43 (Elhauge); Nov. 29 Hr'g Tr., supra note 2, at 69­70 (Nalebuff); id. at 170­71 (Tom).
70. Rubinfeld, supra note 53, at 252 (citing authors of contractual-tying theory).
71. Nov. 29 Hr'g Tr., supra note 2, at 95 (Sibley).
72. Id. at 71­74 (Kattan, Lambert).
73. Id. at 71 (Kattan). He also suggested that a price-cost safe harbor could still be applied and may be adequate to address the concerns raised by the sham or fictitious-discount models. Id. at 93; see also id. at 93 (Sibley) (suggesting that SmithKline was a case in which a price-cost safe harbor was in fact applied to what may have been a fictitious discount).
74. Nov. 29 Hr'g Tr., supra note 2, at 71 (Kattan) (suggesting difficulty in assessing whether the bundling caused out-of-bundle prices to increase, because of other changes (e.g., quality, performance, and product attributes) that may take place over the same period).
75. Muris, supra note 7, at 46­60; see, e.g., Brief of Pacific Bell Telephone Company (D/B/A AT&T California) and Visa U.S.A. Inc. as Amici Curiae Supporting Reversal, Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008) (Nos. 05-35627, 05-35640, 05-36153, 05-36202).
76. Muris, supra note 7, at 30.
77. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 223 (1993).
78. Nov. 29 Hr'g Tr., supra note 2, at 26­27 (Lambert) (describing but not endorsing the rule).
79. Antitrust Modernization Comm'n, supra note 60, at 98 (citing AMC testimony of Steven Salop).
80. Lambert, supra note 7, at 1705; see also Nov. 29 Hr'g Tr., supra note 2, at 27 (Lambert).
81. See Areeda & Hovenkamp, supra note 7, ¶ 749b, at 245­46, 258­59.
82. Id. at 246 ("A rule condemning above-cost package discounts in this situation would run into all the problems that predatory pricing law faces with respect to single-product pricing.").
83. See, e.g., Brief of Amici Curiae Law Professors in Support of Defendant-Appellant and Cross-Appellee PeaceHealth Supporting Reversal of the Verdict Concerning Bundled Discounts, Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008) (Nos. 05-35627, 05-35640, 05-36153, 05-36202) [hereinafter Law Professors' Amici Brief]; Brief of Amici Curiae Genentech, Inc., Honeywell International Inc., Kimberly-Clark Corp., Kraft Foods, Inc., The Coca-Cola Company, and United Technologies Corp. in Support of Appellant/Cross-Appellee PeaceHealth, 515 F.3d 883 (9th Cir. 2008) (Nos. 05-035627, 05-35640) [hereinafter Genentech et al. Amici Brief].
84. Areeda & Hovenkamp, supra note 7, ¶ 749b, at 250­59 (supporting a discount-allocation safe harbor in instances where no significant rivals offer or are likely to offer the same package and viewing it as analogous to tying's requirement that two products are actually tied together).
85. See, e.g., May 8 Hr'g Tr., supra note 52, at 59 (Rill) (preferring the aggregate-cost rule but suggesting as an alternative a discount-allocation safe harbor); id. at 64 (Melamed) (supporting what he described as AMC Commissioner Carlton's approach of using this safe harbor and applying a no-economic-sense test to conduct outside it); id. at 68­70 (Rule) (supporting the safe harbor and, for conduct outside it, focusing on exclusion or foreclosure); Nov. 29 Hr'g Tr., supra note 2, at 21, 94, 97­98 (Nalebuff), id. at 65 (Kattan); id. at 77 (Sibley); id. at 121, 128­29 (Crane); id. at 160, 188­91 (Ordover); see also id. at 151­57 (Tom) (questioning whether a safe-harbor approach rather than use of presumptions is appropriate).
86. 515 F.3d 883, 903 (9th Cir. 2008). Some other case law appears to suggest it as well. See supra Part I(B).
87. Nov. 29 Hr'g Tr., supra note 2, at 62­63 (Kattan).
88. Law Professors' Amici Brief, supra note 83, at 15.
89. May 8 Hr'g Tr., supra note 52, at 58 (Rill); see also id. at 58­60 (concluding that it nonetheless might be appropriate if employed as a safe harbor).
90. Aaron M. Panner, Bundled Discounts and the Antitrust Modernization Commission, eSapience Center for Competition Policy, July 2007, at 6.
92. See Brief for the United States as Amicus Curiae, supra note 6, at 13 n.10; Chapter 3, Part III(C).
93. Nov. 29 Hr'g Tr., supra note 2, at 113 (Muris).
94. May 8 Hr'g Tr., supra note 52, at 61 (Muris).
95. Antitrust Modernization Comm'n, supra note 60, at 99.
100. Compare, e.g., May 1 Hr'g Tr., supra note 54, at 143­44 (Elhauge) (noting both that a less efficient rival may constrain a monopolist's pricing and that a monopolist can raise its rivals' costs by denying it economies of scale), and Steven C. Salop, Avoiding Error in the Antitrust Analysis of Unilateral Refusals to Deal 5 (Sept. 21, 2005) (unpublished manuscript), available at http://govinfo.library.unt.edu/amc/commission_hearings/pdf/Salop_Statement_Revised%209-21.pdf ("Entry by higher cost . . . competitors can provide competition to a monopolist and cause prices to fall and output to rise, which increases consumer welfare and allocative efficiency."), with Areeda & Hovenkamp, supra note 7, ¶ 749a, at 242 ("Requiring the defendant's pricing policies to protect the trade of higher cost rivals is overly solicitous of small firms and denies customers the benefits of the defendant's lower costs."), and id. ¶ 749b1, at 249 ("[N]o firm, not even a monopolist, is a trustee for another firm's economies of scale. To force such a firm to hold a price umbrella over its rivals . . . in order to protect the rivals' inefficiently small production, would be a blatant example of protecting competitors at the expense of consumers.").
101. Antitrust Modernization Comm'n, supra note 60, at 100. The AMC also noted that it was not "recommending application of [its three-part test] outside the bundled pricing context, for example in tying or exclusive dealing cases." Id. at 114 n.157.
102. Areeda & Hovenkamp, supra note 7, ¶ 749b2, at 251.
103. See supra chapter 4, part I (C)(3) for a discussion of the appropriate cost measures to apply in predatory-pricing cases.
104. See also Antitrust Modernization Comm'n, supra note 60, at 99 (stating that "after allocating all discounts and rebates attributable to the entire bundle of products to the competitive product, the defendant sold the competitive product below its incremental cost for the competitive product"). Where there are multiple competitive products in such a bundle, the Department believes that the discount-allocation safe harbor should apply to all of the monopolist's competitive products together. For example, if the monopolist produces monopoly good X and competitive goods Y and Z, the discount-allocation safe harbor should apply to goods Y and Z together, regardless of whether plaintiff or any other rival produces both goods Y and Z. Because goods Y and Z are competitive, a rival could offer these goods in a package even if the rival did not itself produce both goods. Equally efficient producers of Y and Z could jointly offer a Y­Z package and would not be foreclosed by the monopolist's bundled offering if the monopolist came within the discount-allocation safe harbor as applied to Y­Z together.
105. The AMC and others have been especially concerned about the risk of false positives in prosecuting bundled discounting, relative to the likelihood of false negatives. See, e.g., Antitrust Modernization Comm'n, supra note 60, at 94­100; Nov. 29 Hr'g Tr., supra note 2, at 55­64 (Kattan); Areeda & Hovenkamp, supra note 7, ¶ 749b2, at 243­45; Crane, supra note 7, at 465­68; Muris, supra note 7, at 8. But see Roy T. Englert, Jr., Defending the Result in Lepage's v. 3M: A Response to Other Commentators, 50 Antitrust Bull. 481, 485­86, 497 (2005) (suggesting that there may be more reason to worry about false negatives relative to false positives for bundled pricing than with predatory pricing).
106. Two AMC Commissioners, although joining the AMC's unanimous recommendation on how to treat bundled discounting, expressed concern that many pricing schemes where exclusion is not an issue would fall outside the safe harbor and thus be subject to further scrutiny. See Antitrust Modernization Comm'n, supra note 60, at 99 n.*; see also id. at 398­99 (if the AMC's discount-allocation safe harbor is adopted by courts, there should not be a negative presumption from failing it).
107. See, e.g., Nov. 29 Hr'g Tr., supra note 2, at 41, 43­45 (Sibley); id. at 59­60, 92 (Kattan); id. at 118 (Muris).
108. Id. at 201 (Tom); see also May 8 Hr'g Tr., supra note 52, at 69­70 (Rule) (stressing the importance of focusing on the extent of the exclusion of competition for pricing that falls outside the safe harbor); id. at 72 (Melamed) ("I assume everybody agrees here we have to have a rigorous competitive effects test.").
109. As discussed above, the Department believes that ordinary predatory-pricing analysis should apply if bundle-to-bundle competition is reasonably possible.
short-term losses." Antitrust Modernization Comm'n, supra note 60, at 99. This requirement effectively serves as another screen. However, the Department believes this requirement is logically problematic, because a defendant that fails the first discount-allocation prong is not necessarily incurring any short-term losses from offering bundled discounts, so there may not be any short-term losses to recoup. The PeaceHealth court rejected the recoupment prong of the AMC test on the ground that, as opposed to predatory pricing, "exclusionary bundling does not necessarily involve any loss of profits for the bundled discounter," making it "analytically [un]helpful to think in terms of recoupment of a loss that did not occur." 515 F.3d 883, 910 n.21 (9th Cir. 2008). One AMC Commissioner has suggested that the recoupment prong was inserted largely to make the AMC's bundled-discounting test look more like the Brooke Group test for predatory pricing and that, while a recoupment safe harbor is part of the AMC recommendation, he "wouldn't pay an awful lot of attention to it." May 1 Hr'g Tr., supra note 54, at 155­56 (Jacobson). Moreover, if the competitive harm that may flow from bundled discounts (where bundle-to-bundle competition is not possible) is not really from predatory pricing, there would appear to be little reason to try to mirror the Brooke Group predatory-pricing test.
111. Antitrust Modernization Comm'n, supra note 60, at 99.
112. Genentech et al. Amici Brief, supra note 83, at 19, 20.
113. Nov. 29 Hr'g Tr., supra note 2, at 102 (Nalebuff).
114. Id. at 177­79 (Ordover).
115. Id. at 179 (Muris).
116. Id. at 99­100 (Lambert).
117. Antitrust Modernization Comm'n, supra note 60, at 398.
118. Id. (emphasis in original).
119. Id. at 399 (further suggesting that a defense showing that the challenged pricing was used either for many years (so that predation was unlikely) or during a time with no possibility of predation should suffice).
120. May 8 Hr'g Tr., supra note 52, at 64 (Melamed).
121. Nov. 29 Hr'g Tr., supra note 2, at 202 (Crane).
122. Id.; see also May 8 Hr'g Tr., supra note 52, at 64 (Melamed) ("You ought to allow the defendant and the plaintiff to duke it out over whether the bundling made economic sense."); Nov. 29 Hr'g Tr., supra note 2, at 182, 202 (Ordover).
123. Areeda & Hovenkamp, supra note 7, ¶ 749b2, at 262.
124. Id. Hovenkamp's acceptance of "any proven explanation" for bundled discounting differs from his general definition of unlawful exclusionary conduct, which does not allow any proven benefits to outweigh competitive harms but instead condemns conduct where the harms produced are disproportionate to the benefits. Id. ¶ 651a, at 72 (2d ed. 2002). Hovenkamp's acceptance of "any proven explanation" for bundled discounts appears to be based on the immediate lowering of prices to consumers provided by such discounts.
125. Id. ¶ 749b2, at 265.
126. Nov. 29 Hr'g Tr., supra note 2, at 203 (Tom).
127. Id. at 103­04 (Nalebuff).
128. See id. at 103 (Kattan).
129. It is possible that a plaintiff will lose sufficient sales due to bundled discounting so that even though it remains in the market, it could be a significantly less vigorous competitor. Those allegations are easy to make but deserve careful scrutiny. For example, although plaintiff's average costs almost certainly will rise if it loses sales due to bundled discounting, its marginal costs may not significantly increase and thus its competitive significance may not be diminished even though it is operating at a reduced scale. Cf. Nov. 29 Hr'g Tr., supra note 2, at 179 (Tom) (suggesting "looking for the rival's marginal cost to be raised in such a way that the perpetrator can raise prices"). Moreover, other rivals may still be able to compete vigorously in the market.
130. The offering of discounts or rebates contingent upon a buyer's purchase of two or more different products--or bundled discounting--is addressed in part I of this chapter.
131. The applicability of the discount to all units distinguishes the situation from various pricing schedules that consumers frequently face. For example, a record club might offer "buy two albums at full price, and get all additional albums at 50% off." In that situation, the discounts do not go back to the first units. Similarly, a sandwich shop may charge $5 for a sandwich and give customers a frequent-buyer card that offers a free sandwich after the card has been stamped ten times. Under this type of loyalty-reward program, a customer pays $5 each for sandwiches 1­10, nothing for sandwich 11, and then $5 again for sandwich 12. This chapter does not address such practices.
132. See, e.g., Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039 (8th Cir. 2000).
133. See, e.g., Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227 (1st Cir. 1983) (Breyer, J.).
134. One panelist suggested that single-product loyalty discounts, unlike exclusive-dealing contracts, "are not found in nature" and occur only with "firms which have substantial positions in the market." May 8 Hr'g Tr., supra note 52, at 82 (Creighton). Another panelist questioned whether there is evidence to support the assertion "that unlike bundling and exclusive dealing which we find everywhere, loyalty discounts are somehow a practice that we only find with firms with very large market shares." Id. at 84 (Muris).
135. See David E. Mills, Market Share Discounts (Aug. 8, 2008) (unpublished working paper), available at http://www.virginia.edu/economics/papers/mills/Market%20Share%20Discounts.pdf.
136. Dennis W. Carlton, A General Analysis of Exclusionary Conduct and Refusal to Deal--Why Aspen and Kodak Are Misguided, 68 Antitrust L.J. 659, 664 (2001).
137. See, e.g., Sreya Kolay et al., All-Units Discounts in Retail Contracts, 13 J. Econ. & Mgmt. Strategy 429 (2004); Patrick Greenlee & David Reitman, Competing with Loyalty Discounts (Jan. 7, 2006) (unpublished working paper), available at http://www.wcas.northwestern.edu/csio/Conferences/Papers2006/GreenleeandReitmanpaper.pdf.
138. Feb. 13 Hr'g Tr., supra note 52, at 106 (Stern) (stating that it may be appropriate to distinguish this situation from situations in which "suppliers can essentially compete to supply the entire demand of the customer").
139. See Willard K. Tom et al., Anticompetitive Aspects of Market-Share Discounts and Other Incentives to Exclusive Dealing, 67 Antitrust L.J. 615, 627 (2000) (arguing that discounts can be used to achieve total or partial exclusivity where a "dominant firm is so well established among ultimate consumers that its customers . . . have a base, inelastic demand for the firm's products").
140. Id. at 636; see also Nov. 29 Hr'g Tr., supra note 2, at 199 (Tom) (questioning whether it is preferable to "look at the incremental sales that were induced by the loyalty program and look at the revenues from those incremental sales and compare it to incremental cost" or "apply a Brooke Group test" comparing "all of the sales, all of the revenues" to "all of the costs for all of the sales"); Robert H. Lande, Should Predatory Pricing Rules Immunize Exclusionary Discounts?, 2006 Utah L. Rev. 863, 870­74, 877­80 (providing hypothetical examples of all-unit discounts resulting in below-cost pricing on marginal units).
141. See May 8 Hr'g Tr., supra note 52, at 82­83 (Creighton); Nov. 29 Hr'g Tr., supra note 2, at 79­84 (Nalebuff); id. at 84 (Sibley); id. at 99­100 (Lambert); Tom et al., supra note 139, at 633­34; see also Areeda & Hovenkamp, supra note 7, ¶ 749b, at 248 (recognizing that there may be situations where an above-cost single-product discount "increases the dominant firm's sales so much that it denies rivals economies of scale because they cannot get their own output high enough").
142. 724 F.2d 227 (lst Cir. 1983) (Breyer, J.).
149. Id. at 236. Even if price exceeding both incremental and average costs was not determinative, then-Judge Breyer noted that there was evidence that the discount enabled Pacific to operate more efficiently, because it led to a firm order that allowed Pacific to utilize its excess snubber capacity. Id.
150. 207 F.3d 1039 (8th Cir. 2000).
154. See id. (Brunswick's above-cost prices left ample room for new competitors to enter the market and lure customers away with superior discounts); id. at 1062 (questioning the district court's rejection of Brunswick's contention that above-cost discounts are per se lawful).
158. 69 F. Supp. 2d 571 (S.D.N.Y. 1999), aff'd, 257 F.3d 256 (2d Cir. 2001).
161. 257 F.3d at 269; 69 F. Supp. 2d at 580.
162. 69 F. Supp. 2d at 575­77.
164. No. CV 02-4770 MRP, 2006 WL 1236666 (C.D. Cal. Mar. 22, 2006).
165. Id. at **11, 15. The court, however, vacated the jury's findings of liability based on bundled discounts and co-marketing arrangements. Id. at *14.
169. Id. at **5­6 ("The jury was free to conclude that Tyco's Market Share Discounts, in practical effect, offered hospitals their best discount only if they dealt with Tyco exclusively. . . . Although the Market Share Discount agreements appear to have been terminable on short notice on their face, the jury could reasonably have concluded that in practice they were not.").
170. Nos. 1:01-CV-704, 1:03-CV-781, 2005 WL 1396940 (S.D. Ohio June 13, 2005), aff'd on other grounds, 485 F.3d 880 (6th Cir. 2007).
175. Id. at *17. The court granted summary judgment for Wyeth on the section 1 exclusive-dealing claim, finding that plaintiffs could not establish the necessary substantial foreclosure of competition. Id. at **10­11.
176. See Mills, supra note 135, at 26.
177. Carlton, supra note 136, at 664.
178. See Feb. 13 Hr'g Tr., supra note 52, at 106 (Stern); see also Nov. 29 Hr'g Tr., supra note 2, at 79 (Nalebuff) (describing Concord Boat as a case in which defendant "had a monopoly for some share of the market based on installed base").
179. See supra text accompanying notes 138­39.
180. Areeda & Hovenkamp, supra note 7, ¶ 749b, at 245.
181. See, e.g., Lande, supra note 140, at 878, 880 (suggesting that Professor Hovenkamp's attribution test for bundled discounts "easily could be used to evaluate the discounts involving just the marginal, contested units for one product, a virtually identical situation," but suggesting that a rule banning all "all-units" discounts would be a preferable way of handling single-product loyalty discounts).
182. Tom et al., supra note 139, at 615.
183. Areeda & Hovenkamp, supra note 7, ¶ 749b, at 245.
184. See id. ¶ 749b, at 248.
185. See id. ¶ 749b, at 245, 248­50.
186. Id. ¶ 749b, at 245.
188. Nov. 29 Hr'g Tr., supra note 2, at 99­100 (Lambert); see also id. at 60­65 (Kattan) (supporting Professor Hovenkamp's approach and stressing the need for pricing rules that are administrable and enable firms to base pricing decisions on an objective measure).
189. See, e.g., May 8 Hr'g Tr., supra note 52, at 81­82 (Rule) (stating that he is "not aware of any good case that's ever been pointed to where a loyalty discount has really had an anticompetitive effect" and that applying a Brooke Group test will dispose of virtually all cases); Feb. 13 Hr'g Tr., supra note 52, at 156­57 (Sewell) (Hovenkamp approach is "a clear and sensible rule"); Sherman Act Section 2 Joint Hearing: International Issues Hr'g Tr. 116, Sept. 12, 2006 (Bloom) (suggesting using price above average avoidable cost as a safe harbor).
190. Nov. 29 Hr'g Tr., supra note 2, at 196 (Crane).
192. Id. at 83 (Kattan).
193. Lande, supra note 140, at 863­64.
195. See id. at 870­74.
198. See supra text accompanying notes 138­39.
199. Feb. 13 Hr'g Tr., supra note 52, at 106 (Stern); see also Nov. 29 Hr'g Tr., supra note 2, at 79­80 (Nalebuff).
200. See Nov. 29 Hr'g Tr., supra note 2, at 195 (Ordover) (resisting distinguishing single-product discounts from bundled discounts because "[i]f you believe in the competitive equilibrium model, every good is a single different thing"); id. at 197 (Tom) ("[I]t can be very difficult to distinguish single product from multiproduct situations as a theoretical matter."); see also Lande, supra note 140, at 878 (arguing that Professor Hovenkamp's attribution test for bundled discounts "easily could be used to evaluate the discounts involving just the marginal, contested units for one product, a virtually identical situation").
201. Nov. 29 Hr'g Tr., supra note 2, at 199 (Tom); see id. at 197 (suggesting that a Brooke Group test would be warranted only if based on conclusions regarding "administrability and cost of false positives and false negatives . . . because there are certainly plenty of possibility proofs that show that you can have anticompetitive effects in this situation even with overall price exceeding overall cost").
202. Id. at 194 (Ordover).
203. See Ordover & Shaffer, supra note 3, at 20.
204. Feb. 13 Hr'g Tr., supra note 52, at 105 (Sheller) (distinguishing discounts conditioned on buying one-hundred percent of needs from those conditioned on sixty to seventy percent); see also id. at 201 (Wark) (suggesting that loyalty discounts should be analyzed in a predatory-pricing context unless "you can equate the loyalty program with making it exclusive, then maybe you have to analyze it in an exclusive dealing context").
205. Tom et al., supra note 139, at 615.
207. Competitive Impact Statement at 18, United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995) (Nos. 95-5037, 95-5039), available at http://www.usdoj.gov/atr/cases/f0000/0045.pdf (noting that, while the Department considered relief limiting the manner in which Microsoft could structure discounts, it would not require such relief because it did not have evidence that Microsoft had in fact structured volume discounts to achieve anticompetitive ends) (emphasis in original).
208. See May 8 Hr'g Tr., supra note 52, at 82­83 (Creighton); Nov. 29 Hr'g Tr., supra note 2, at 79­84 (Nalebuff); id. at 99­100 (Lambert); id. at 194­96 (Ordover); id. at 196­97 (Tom).
209. May 8 Hr'g Tr., supra note 52, at 82­83 (Creighton).
210. See Nov. 29 Hr'g Tr., supra note 2, at 79­80 (Nalebuff).
211. See Tom et al., supra note 139, at 622­23.
212. Carlton, supra note 136, at 664.
214. Id. at 665 (footnote omitted). The 1995 Microsoft consent decree forbade Microsoft from using "per processor" contracts, under which an Original Equipment Manufacturer (OEM) paid Microsoft a royalty based on the total number of computers it sold, regardless of the number of such computers containing Microsoft operating systems. The Department's Competitive Impact Statement stated: "In effect, the royalty payment to Microsoft when no Microsoft product is being used acts as a penalty, or tax, on the OEM's use of a competing PC operating system." Competitive Impact Statement, supra note 207, at 5.
215. Areeda & Hovenkamp, supra note 7, ¶ 749b1, at 247­48.
216. Herbert Hovenkamp, The Law of Exclusionary Pricing, Competition Pol'y Int'l, Spring 2006, at 21, 28; see also May 8 Hr'g Tr., supra note 52, at 80 (Pitofsky) (suggesting that loyalty discounts present less of a problem than exclusive dealing because they tend to be only partially exclusive and therefore exclude less, and the customer can switch at any time, losing only its discount).
217. Areeda & Hovenkamp, supra note 7, ¶ 749b1, at 249.
218. For example, assume a customer who is a retailer expects to sell 100 widgets, believes that it must carry 80 of the monopolist's widgets, and is currently paying $10 per widget. A new entrant appears, offering widgets to the customer for $7. On these assumptions, if the monopolist keeps the price at $10 but offers to charge $8 per widget if the customer buys 100, the customer will choose to buy all 100 widgets from the monopolist--since it must buy 80 and will pay the same total ($800) whether it buys 80 or 100, it is essentially getting the last 20 widgets free. If the monopolist instead had simply lowered the price to $8, the customer would have continued to purchase 80 widgets from the monopolist and bought 20 from the new entrant.
219. Nov. 29 Hr'g Tr., supra note 2, at 99­100 (Lambert).
220. Id. at 83 (Kattan).
221. Id. at 84 (Sibley). One panelist whose company is plaintiff in ongoing litigation argued more broadly that "a retrospective discount or rebate . . . is usually, when deployed by a monopolist, not a rebate or discount at all. It's a price coupled with the threat of a price increase ." Sherman Act Section 2 Joint Hearing: Business Testimony Hr'g Tr. 176­77, Jan. 30, 2007 (McCoy). However, another panelist whose company is defendant in that litigation argued that "really the way to look at loyalty discounts is these are incentives to buy. These are not punishments for failure to buy." Feb. 13 Hr'g Tr., supra note 52, at 201 (Sewell).
222. May 8 Hr'g Tr., supra note 52, at 83 (Melamed).
224. Id. at 81­82 (Rule).
226. International Chamber of Commerce, Single-Firm Conduct as Related to Competition 3 (Jan. 11, 2006) (hearing submission).

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