Conditional Discounts and the Law of Exclusive Dealing

Posted by Social Science Research Network

Conditional Discounts and the Law of Exclusive Dealing Derek W Moore (Federal Trade Commission) & Joshua D. Wright (George Mason University)

Abstract: The appropriate antitrust analysis of conditional discounts remains a subject of considerable debate. The debate surrounding how the law ought to treat conditional “discounts” stems largely from the fact that certain discounting practices resemble both conduct that the antitrust laws have analyzed under the “predation” rubric and conduct that the antitrust laws have analyzed under the “exclusion” rubric. The critical question, then, is whether the law should analyze conditional discounts as price predation, exclusive dealing, or some hybrid combination of the two. This Article argues that exclusive dealing provides a superior framework for analyzing conditional discounts. The basis for this claim is relatively simple. There are two economic paradigms to analyze anticompetitive conduct that is not the product of collusion among competitors: predation and exclusion. Most, if not all, modern cases involving conditional discounts are based upon theories of economic harm grounded in the RRC-exclusion framework. Because the relevant economics for understanding these claims involves the economics of exclusion, the legal framework best suited to analyze conditional discounts is the one most closely aligned to the economics of exclusion. As this Article will demonstrate, price-cost tests applied to predatory pricing are not a good match for the economics of exclusion. A price below cost is neither necessary nor sufficient for exclusion. Further, importing a price-cost test to analyze claims sounding in exclusion rather than predation inserts intellectual distance between antitrust economics and the correct legal standard – rather than more closely aligning industrial-organization economics and antitrust law, as has been the overwhelming and beneficial trend over the past fifty years. The false allure of the increased administrability of price-cost tests has led many scholars to argue that loyalty discounting is the exceptional case in which the antitrust laws are improved by imposing a legal framework that does not comport closely with the economic forces describing most conditional-discount-based antitrust claims. They are wrong, both because price-cost tests in the conditional-discount context require subjective, costly, and uncertain determinations of contestability and because prices below cost are not a necessary condition of the relevant anticompetitive mechanism allegedly at work in exclusion cases. Accordingly, courts should reject price-cost tests in conditional-discount cases alleging exclusion in favor of the rule of reason framework applied in exclusive-dealing cases.