Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Wednesday, June 18, 2008

Bundled Discounts as Competition for Distribution

Posted by D. Daniel Sokol

Ben Klein of UCLA (Department of Economics) and LECG discusses Bundled Discounts as Competition for Distribution in his latest working paper.

ABSTRACT: The antitrust law of bundled discounts is unsettled. LePage’s broadly condemned bundled discounts instituted by a dominant firm where it appeared that the discounts served no economic purpose other than to place rival, single-product suppliers at a competitive disadvantage. In contrast, PeaceHealth more recently proposed a less restrictive standard, requiring for antitrust liability that the firm’s attributed price, allocating all discounts on the entire bundle of products to the rival’s product, be less than the firm’s costs of producing that product.

A major shortcoming in both of these decisions, and in antitrust analysis more generally, is the failure to understand the competitive role served by bundled discounts. This absence of a pro-competitive rationale has fundamentally influenced the terms of the debate and antitrust litigation. Without an understanding of the pro-competitive economic forces that may lead firms to use bundled discounts, competition does not appear to be occurring “on the merits.” This leaves bundled discounts unnecessarily vulnerable to challenge on monopolization/attempted monopolization grounds.

The Antitrust Modernization Commission’s attempt to develop reasonable safe harbor screens, including the attributed price less than cost requirement adopted by the PeaceHealth court, was an effort to control such challenges to pricing arrangements generally considered part of the normal competitive process, even if we do not know exactly what purpose they serve.

The goal of this article is to begin to fill this gap in our economic understanding by outlining the possible efficiencies associated with bundled discounts. In undertaking this economic analysis, this article focuses on cases of bundled discount arrangements that have the potential effect of limiting competitors’ access to the market by controlling distribution.

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