Antitrust & Competition Policy Blog

Price-concentration analysis in merger cases with differentiated products

Posted by D. Daniel Sokol

Walter Beckert Birkbeck College, University of London, IFS and UK Competition Commission and Nicola Mazzarotto UK Competition Commission explain Price-concentration analysis in merger cases with differentiated products.

ABSTRACT: This paper considers the empirical assessment of the relationship between prices and number of firms in local markets in geographic or, more generally, characteristic space and its use as evidence in merger cases. It outlines a structural, semi-nonparametric econometric model of competition in such markets, examines its testable implications in terms of price-concentration relationships, and demonstrates that the model is non-parametrically identified. This general approach to priceconcentration analysis in differentiated product markets is illustrated in a small-scale application to cinemas in the UK. The application highlights the main decision points faced by an authority when assessing the weight that can be attached to this type of analysis as evidence.

Market Definition with Shock Analysis

Posted by D. Daniel Sokol

Øystein Daljord, Norwegian School of Economics and Business Administration, Lars Sorgard, Norwegian School of Economics and Business Administration, and Øyvind Thomassen, explain  Market Definition with Shock Analysis.

ABSTRACT: The SSNIP test for market definition requires information about demand substitution and profitability. If detailed information about demand is not available, observed effects of a shock in the industry may be an alternative source of evidence. In the existing literature, shock analysis has unfortunately not been clearly linked to the SSNIP test. The lack of a rigorous framework may confuse the interpretation of the effects of shocks. We illustrate how a shock can be evaluated within the SSNIP framework with a minimum of data. We apply our criterion to a capacity expansion in the ferry market in the North Sea.

The FTC's Anticompetitive Pricing Case Against Intel

Posted by D. Daniel Sokol

Herb Hovenkamp (Iowa Law) provides his thoughts on The FTC's Anticompetitive Pricing Case Against Intel.

ABSTRACT: The FTC’s wide ranging complaint against Intel Corporation indicates that the FTC intends to rely on the “unfair methods of competition” language in §5 of the FTC Act to reach beyond the proscriptions on unilateral conduct contained in §2 of the Sherman Act. The Supreme Court has expressly authorized such expansion, and statutory text, legislative history and legal policy all support it. While §2 reaches only conduct that threatens to “monopolize” a market, the “unfair methods of competition” language can reach improper abuses of a dominant position that fall short of creating monopoly. Further, the FTC has expertise that courts of general jurisdiction cannot command and is not encumbered with jury trials. Because private parties cannot enforce §5 there is no need to worry about the potential for socially costly tagalong private antitrust suits.

One important concern that arises when the FTC reaches beyond the Sherman Act is that the remedy itself not be contrary to the consumer welfare goals of the antitrust laws. Pricing is particularly complex in a market with high fixed costs and short product cycles, as is the case for Intel’s processor chips. The combination of high R&D costs plus high fixed setup costs, plus relatively low production costs, means that the key to success in the microprocessor market is high volume. When setting a price a firm such as Intel faces two types of risk to its high volume – one is general market risk and the other is risk of customer defections. A firm in Intel’s position might profit by bearing the market risk, which is largely outside of the control of both its customer and itself. But the risk of customer defection is one that it needs to control if it is to keep its output high and per unit cost down. The price Intel can bid is critically dependent on the number of sales it can confidently predict. Bids conditioned on market share discounts, quantity discounts and related practices such as exclusive dealing give Intel the assurance of output that it needs to bid a low price.

In this case the FTC requests that Intel be required to keep prices at an irrationally high level. Limitations on “below cost” pricing would require Intel to include a mandated multiple of fixed costs into its bids, even though any firm in Intel’s situation could profitably bid prices down to its incremental costs. Some market share discounts would apparently be forbidden without any proven relationship to cost. Relief such as this will serve the goal of giving Intel’s rivals a price umbrella under which they can profit, but it is not calculated to produce competitive solutions that will benefit consumers.

Vertical Relations Under Credit Constraints

Posted by D. Daniel Sokol

Volker Nocke, Department of Economics, University of Oxford - Department of Economics and John E. Thanassoulis, University of Oxford - Department of Economics explain Vertical Relations Under Credit Constraints.

ABSTRACT: We model the impact credit constraints and market risk have on the vertical relationships between firms in the supply chain. Firms which might face credit constraints in future investments become endogenously risk averse when accumulating pledgable income. In the short run, the optimal supply contract therefore involves risk sharing, thereby inducing double marginalization. Credit constraints thus result in higher retail prices. The model offers a concise explanation for several empirical regularities of firm behavior. We demonstrate an intrinsic complementarity between supply and lending providing a theory of finance arms of major suppliers; a monetary transmission mechanism linking the cost of borrowing with short-run retail prices that can help explain the price puzzle in macroeconomics; a theory of countervailing power based on credit constraints; and a motive for outsourcing supply (or distribution) in the face of market risk.

 

Competition, Innovation and Maintaining Diversity Through Competition Law

Posted by D. Daniel Sokol

Wolfgang Kerber, Philipps University Marburg - Department of Business Administration and Economics explains Competition, Innovation and Maintaining Diversity Through Competition Law.

ABSTRACT: The analysis of the advantages of competition as a process of parallel experimentation is a neglected dimension of competition. Innovation competition as a trial and error-process can be analyzed as an evolutionary process of variation and selection of new problem solutions, which allows to apply arguments and models of evolutionary innovation economics. Both through the analysis of the general benefits of diversity as well as from the analysis of the advantages of parallel research, it can be shown that a larger number and diversity of independently experimenting competitors can have a positive effect on innovation. Since there might be also advantages of a larger firm size, a trade off might occur leading to the notion of an optimal number of parallel experimenting firms. From this perspective, mergers and R&D agreements, which might reduce the number and diversity of parallel experiments, might have a negative impact on the effectiveness of competition as a knowledgegenerating process of parallel experimentation. Therefore the question arises whether competition law should also protect this dimension of competition. The Innovation Market Analysis in US antitrust policy already developed interesting criteria and policy conclusions for maintaining competition between parallel research projects and protecting diversity - but without an appropriate theoretical reasoning about the benefits of protecting parallel research.

Does a Tougher Competition Policy Reduce or Promote Investment?

Posted by D. Daniel Sokol

Afonso Costa, and Pedro P. Barros, Universidade Nova de Lisboa-Econ ask Does a Tougher Competition Policy Reduce or Promote Investment?

ABSTRACT: The question of how interventions from the Competition Authority (CA) affect investment is not a straightforward one: a tougher competition policy might, by reducing the ability to exert market power, either stimulate firms to invest more to counter the restrictions on their actions, or make firms invest less because of the reduced ability to have a return on investment.

This tension is illustrated using two models. In one model investment is own-cost-reducing whereas in the other investment is anti-competitive. Anti-competitive investments are defined as investments that increase competitors’ costs. In both models the optimal level of investment is reduced with a tougher competition policy. Furthermore, while in the case of an anti-competitive investment a tougher authority necessarily leads to lower prices, in the case of a cost-reducing investment the opposite may happen when the impact of the investment on cost is sufficiently high. Results for total welfare are ambiguous in the cost-reducing investment model, whereas in the anti-competitive investment model welfare unambiguously increases due to a tougher competition policy.

Free Movement of Judgments: Increasing Deterrence of International Cartels through Jurisdictional Reliance

Posted by D. Daniel Sokol

The UCL Institute of Global Law and the UCL Centre for Law and Economics are delighted to present a lecture by

Prof. Michal Gal, Haifa University

on

Free Movement of Judgments:
Increasing Deterrence of International Cartels through Jurisdictional Reliance

Chair: Dr Ioannis Lianos, UCL Faculty of Laws

Wednesday 3 March 2010, 5-6 p.m.

Accredited with 1 CPD hour by the SRA and BSB.

About this lecture:
This lecture challenges the conventional wisdom that not much can be done under the existing atomistic system of antitrust enforcement to solve the problem of sub-optimal deterrence of international cartels. 

Low deterrence results from two main facts: first, international cartels are generally prosecuted by only a fraction of the jurisdictions harmed by them. Second, monetary sanctions imposed by those jurisdictions are generally based only on the harm incurred to their domestic markets.

To solve this problem, this lecture proposes a novel legal tool that would enable countries to adopt and rely upon foreign findings of international hard-core cartels, provided that the foreign decisions meet criteria that ensure that such reliance is reasonable and fair. As elaborated, this free movement of judgments holds potential to overcome the main obstacles to efficient deterrence and to significantly increase both domestic as well as global welfare. Its costs can be overcome to a great extent by designing appropriate solutions. The political implications are also not prohibitive. As shown, jurisdictions already rely on foreign judgments that do not significantly differ from the decisions at hand.

About the speaker:
Professor Michal Gal is vice-dean of the Faculty of Law, Haifa University, Director of the Law and MBA Program, and Co-Director of the Forum on Law and Markets at the Faculty of Law, Haifa University, Israel. She is a Global Hauser Visiting Professor, NYU School of Law and Dean's Visiting Professor at Georgetown University (2007-8) and will be a Visiting Professor at the University of Melbourne, Australia, in 2009. She was also a visiting scholar at Columbia University School of Law. Dr. Gal's research focuses on competition law and policy. She is the author of the book Competition Policy for Small Market Economies (Harvard University Press, 2003) and main author and co-editor of The Law and Economics of Israeli Competition Law (Nevo, 2007, Hebrew). She also published many scholarly articles on competition law issues, including oligopoly pricing, the conditions for antitrust in developing economies, the political economy of antitrust, and the globalization of antitrust. She gave talks and presented papers in numerous conferences and colloquiums. Dr. Gal served as a consultant to several international organizations (e.g. OECD, UNCTAD) on issues of competition law in small and developing economies and is a non-governmental advisor of the International Competition Network (ICN). She also advised several small economies on the framing of their competition laws. Dr. Gal received her J.S.D. and LL.M. in law from the University of Toronto. Both her thesises won the Alan Marks Medal for best thesis. She received her LL.B. from Tel Aviv University, magna cum laude, and clerked in the Israeli Supreme Court. Dr. Gal has won many grants and prizes for her research, including the Zeltner award for young researcher in 2004 and the GIF for young scientist, 2006. She also won several teaching awards.

Misplaced Fears in the Legislative Battle Over Affordable Biotech Drugs

Posted by D. Daniel Sokol

David E. Adelman, University of Texas School of Law and Christopher M. Holman, University of Missouri - Kansas City School of Law describe Misplaced Fears in the Legislative Battle Over Affordable Biotech Drugs.

ABSTRACT: Much like tort reform, the debate over pending legislation on biotech drugs - and particularly regulatory supplements to patent protection - has taken on a significance that dwarfs its impact on overall health care expenditures. Under the pending Health Care Reform legislation, Congress would enact two major reforms: First, creation of an abbreviated Food and Drug Administration (FDA) approval process for follow-on biologics, which are the analogues of generics for conventional drugs. Second, establishment of a twelve-year “data exclusivity” period during which clinical testing data collected by brand-name producers could not be used by competitors to satisfy FDA testing requirements. While the abbreviated FDA approval process enjoys broad support, the data-exclusivity provision has been hotly contested, including strong opposition from the Federal Trade Commission.

We argue that regulatory data exclusivity is a sideshow. Current estimates find that the effect of data exclusivity on health care expenditures would be trivial. For this and other reasons, any potential benefit to patients that might result from a shorter period of data exclusivity would be outweighed by the financial risks to the biotech industry, and particularly the negative impacts on investments in research and development. More importantly, we believe that the current focus on data exclusivity is misplaced. Weak competition in markets for biotech drugs poses a much greater and longer-term problem for patient access - without effective competition, pricing of many biotech drugs will remain high indefinitely. The most important issue for Congress to address ought to be minimizing the barriers to market entry for manufacturers of follow-on biologics after the relevant patent terms and data exclusivity end. We close the article by suggesting a variety of ways in which this objective could be met.

When Caught with Your Hand in the Cookie Jar...Argue Standing

Posted by D. Daniel Sokol

Jay L. Himes (Labaton Sucharow) explains that When Caught with Your Hand in the Cookie Jar...Argue Standing.

ABSTRACT: In Walker Process v. Food Mach. & Chemical Corp., the Supreme Court held that a patent holder who enforces a patent obtained by fraud on the patent office can violate Sherman Act § 2, so long as the other elements of a monopolization claim are proven. Nevertheless, under prevailing law merely obtaining a patent by fraud, however egregious, does not establish an antitrust violation, absent some measure of enforcement. In Walker Process itself, the plaintiff-patent holder and the defendant, the alleged infringer, were themselves competitors. So, when in later cases, competitors of a patent holder asserted comparable § 2 claims, based on Walker Process fraud on the patent office, the courts had no difficulty recognizing the competitor’s standing to sue.

Commonly, the competitor pleaded the Walker Process claim as a counterclaim in the patent holder’s infringement suit. Whether the claim was legally sufficient, however, often turned on whether the patent holder not only fraudulently procured the patent, but also engaged in activity amounting to “enforcing” it against the counterclaiming competitor. Moreover, whether the patent holder’s conduct directed to the competitor constitutes “enforcement” for these purposes was held to be a matter of federal patent law.

The morphing of patent holder conduct – fraudulent procurement and enforcement – into a Sherman Act § 2 violation has led several courts off track. In recent cases, these courts have held that customers of the patent holder – the ones who pay the artificially inflated prices charged under cover of the fraudulently obtained patent – lack standing to allege a Walker Process § 2 claim against the patent holder. These decisions hold, instead, that only a person against whom the patent holder has sought to enforce the patent – typically a competitor or, less frequently, a customer of a competitor – may assert a Walker Process claim.

The decisions are unsound. A Walker Process claim arises under the antitrust laws. Established antitrust principles teach that where a monopolist excludes or otherwise wrongfully restrains a competitor, both the competitor and those who pay the supra-competitive prices that the monopolist is able to extract have standing to sue under Sherman Act § 2. The fact that the monopolist uses a fraudulently procured patent as the means to harm competition, and to impose inflated prices, does not detract from the standing of both groups – competitors and customers who purchase at inflated prices – to sue under § 2.

One of these district court rulings is a case known as DDAVP. Because this case aptly illustrates this recurring issue, I use it as a springboard to discuss standing to allege Walker Process fraud. After discussing the lower court’s ruling in DDAVP, I address the issues raised, and arguments made by the defendants in the Court of Appeals. As I endeavor to demonstrate, DDAVP and similar rulings denying standing to those purchasing directly from the monopolist are incorrectly decided. After that, I critique a commentator-proposal that state attorneys general take up the mantle of asserting Walker Process claims on behalf of direct purchasers. Finally, I conclude by briefly addressing wrinkles in the standing issue when indirect purchasers, typically end-user consumers, sue under state law.

By way of summary, Walker Process establishes that no patent law interest is served by permitting a party who fraudulently procures a patent to use it to inhibit competition. Affording purchasers standing to assert Walker Process claims will advance the compensatory and deterrent functions of the antitrust laws, while also promoting the patent law system by deterring fraud on the patent office.

Most Downloaded New Antitrust Papers on SSRN for December 23, 2009 to February 21, 2010

Posted by D. Daniel Sokol

Most Downloaded New Antitrust Papers on SSRN for December 23, 2009 to February 21, 2010.  Herb Hovenkamp makes the list twice and Barak Orbach tops the list. 

Rank	Downloads	Paper Title
1	133	The Image Theory: RPM and the Allure of High Prices Barak Y. Orbach, University of Arizona,
2	117	Public vs. Private Enforcement of Antitrust Law in Unilateral Conduct Cases - The Interaction Between the Economic Review of the Prohibition of Abuses of Dominant Positions and Private Enforcement Mark-Oliver Mackenrodt, Max Planck Institute for Intellectual Property, Competition & Tax Law,
3	115	Developing Countries and International Competition Law and Policy Kathryn McMahon, University of Warwick - School of Law,
4	115	Misplaced Fears in the Legislative Battle Over Affordable Biotech Drugs David E. Adelman, Christopher M. Holman, University of Texas School of Law, University of Missouri - Kansas City School of Law,
5	106	Does the NBA Still Have Market Power? Exploring the Implications of an Increasingly Global Market for Men’s Basketball Player Labor Marc Edelman, Barry Law School,
6	100	Post-Sale Restraints and Competitive Harm Herbert J. Hovenkamp, University of Iowa - College of Law,
7	97	Arbitration and EU Competition Law in a Multi-Jurisdictional Setting Assimakis Komninos, University College London, Department of Law,
8	97	Competition Policy and Comparative Corporate Governance of State-Owned Enterprises D. Daniel Sokol, University of Florida - Levin College of Law,
9	83	The Federal Trade Commission and the Sherman Act Herbert J. Hovenkamp, University of Iowa - College of Law,
10	68	Coordinated Effects Janusz A. Ordover, NYU - Econ, Compass Lexecon,

Antirust Law: Merger Control and Dynamic Market Processes

Posted by D. Daniel Sokol

Diego Arce Jofre, Instituto Boliviano de Investigaciones Jurídicas, Grupo de Investigación Sectores Económicos Regulados, analyzes Antirust Law: Merger Control and Dynamic Market Processes.

ABSTRACT: In the antitrust law, measurements of merger control are the result of a vision of the market and competition focused on perfect market paradigm. Overcoming this conception and replacing this point of view, for one centered in the dynamic market processes, gives us a new reading of the market and of what is meant by competition. Identify the competition, as a process of rivalry and entrepreneurship, constantly dynamic, inhibits to the justice the pursuit of perfect competition paradigm. In that order, measurements like merger cannot be legally justified and must be criticized.

This paper analyzes the merger control inconsistencies in the antitrust law, from the standpoint of the theory of dynamic market processes.

Competition, Contracts, and Innovation

Posted by D. Daniel Sokol

John Simpson, FTC and Christopher J. Metcalf, FTC address Competition, Contracts, and Innovation in a new working paper.

ABSTRACT: Our paper contributes to the literature on the relationship between innovation and market power by considering how changes in the intensity of product market competition affect innovation when managerial compensation is a linear function of firm profits. Changes in the intensity of product market competition affect both the return from innovation and the cost of inducing managers to innovate. Several recent papers account for both the returns-to-investment effect and the agency-cost effect in analyzing the effect of additional product market competition on incentives to innovate (see e.g., Schmidt (1997), Raith (2003), and Piccolo, D'Amato, and Martina (2008)). Our model differs from these papers in the type of contract that we assume firms can use to induce innovation. With linear profit-sharing contracts, the cost of a non-drastic innovation declines as product market competition increases because the increment gained from innovation becomes a larger fraction of the total profit. We argue that this decline in the cost of attaining innovation as competition increases means that competition will often lead to more innovation even in models where the returns to innovation otherwise would fall as competition increases.

The Role of Static and Dynamic Analysis in Pharmaceutical Antitrust

Posted by D. Daniel Sokol

Tom Rosch (FTC) has given a speech on The Role of Static and Dynamic Analysis in Pharmaceutical Antitrust.

Coordinated Remedies: Convergence, Cooperation, and the Role of Transparency

Posted by D. Daniel Sokol

Christine Varney gave a speech Coordinated Remedies: Convergence, Cooperation, and the Role of Transparency at the Institute of Competition Law New Frontiers of Antitrust Conference on February 15, 2010.

Dr. Alexander Italianer in Philip Lowe out as Director-General for Competition

Posted by D. Daniel Sokol

A bio on Italianer is available here.

Intellectual Property And The Limits Of Antitrust

Posted by D. Daniel Sokol

Katarzyna Czapracka (White & Case) has a new book out on Intellectual Property And The Limits Of Antitrust.

BOOK ABSTRACT: The scope of US antitrust law as defined in the Supreme Court’s decisions in Trinko and Credit Suisse Securities is much narrower than the scope of EU competition law. US antitrust enforcers have become increasingly reluctant to apply antitrust rules to regulated markets, whereas the European Commission has consistently used EU competition rules to correct the externalities resulting from government action. The contrasting approaches adopted by US and EU antitrust enforcers to these issues, as with the differences in addressing market dominance, have had a profound impact on the scope of antitrust intervention in the IP field. This book provides an in-depth analysis of the relevant recent developments on both sides of the Atlantic and identifies the pitfalls of regulating IP through competition rules.

Single-Firm Conduct: A Discipline in Search of Itself (Try with Google?)

Posted by D. Daniel Sokol

Roberto Pardolesi, Libera Università degli Studi Sociali (LUISS) Guido Carli and Luca Arnaudo, Libera Università degli Studi Sociali (LUISS) Guido Carli have written on Single-Firm Conduct: A Discipline in Search of Itself (Try with Google?).

ABSTRACT: This paper analyzes US and EU antitrust policies towards abusive unilateral conduct pursued by a dominant firm and strongly criticize them, aiming at finding a more reliable assessment of the basic issues of consumer's exploitation and rival's exclusion. In fact, the discipline of unilateral conduct denounces widespread inconsistencies related to its conceptual foundations. The American side does not recognize exploitation as a form of abusive conduct for the dominant firm: excessive pricing is no issue in the US antitrust environment, and Supreme Court jurisprudence from Trinko to linkLine makes crystal clear that setting a more-than-competitive price not only escapes prohibition, but is the award reserved for the winners of the struggle in the market arena. Article 82 (a) of the EC Treaty forbids the imposition of unfair purchase or selling prices or other unfair trading conditions, but Commission's case law and policy statements (e.g. the 2008 Guidance Paper on Commission enforcement priorities in applying Article 82) have greatly emphasized exclusionary effects, with exploitative effects appearing to be little more than a sideshow. This practical emasculation of the relevant discipline makes little sense either in economic or legal terms, and leaves the overall conceptual picture in a state of complete disarray, with direct consequences on the legal enforcement. The many antitrust issues arising from the Google Books Settlement case are a good occasion to verify the sustainability of the antitrust policy towards single-firm conduct previously discussed: more in details, the risks of future excessive pricing stemming from the approval of the settlement led many commentators, as well as the US Department of Justice, to reconsider the award-of-the-winner theory. The paper also addresses this topic and try to offer a sound overview of it.

Back from Paris - and some OECD News

Posted by D. Daniel Sokol

I am back from the OECDCompetition Committee meeting in Paris.  There were some interesting developments.  Joe Phillips is retiring as head of the Competition Committee.  Mike Wise, who has written over 50 peer reviews and knows more about the internal working of many competition agencies than some of the newer people at those agencies is also retiring.

I presented a talk on  Competition Policy and Comparative Corporate Governance of State-Owned Enterprises, building off of my paper (download it here).  The quality of the meetings is good but people need to stick strictly to time limits as sessions would go over the allotted time. Also, the format would be improved by work Q&A.  With so many people in the room, people want to talk and the forum should allow for better audience participation (with short comments preferred).

Crime and Custom in the Dutch Construction Industry

Posted by D. Daniel Sokol

Marc Hertogh, University of Groningen - Faculty of Law has written on Crime and Custom in the Dutch Construction Industry.

ABSTRACT: In 2001, the construction industry in the Netherlands was at the heart of many public and political debates. A television documentary suggested that all major construction companies were involved in an illegal clearing system that colluded in price offers for public works. After this TV program, the Dutch parliament decided to conduct a parliamentary enquiry which showed a widespread use of cartels and structural ‘bid rigging’ within the Dutch construction industry. Despite the fact that the clearing system of the Dutch construction industry was prohibited by the European Commission in 1992 and by the 1998 Dutch Competition Act, Dutch builders continued their illegal activities as if nothing had changed. This case raises several important questions. Why were these practices so widespread in the Dutch construction industry? Why did Dutch contractors continue these practices even after they were made illegal? And – in more general terms – what does this case tell us about the interplay between state-regulation and self-regulation? Most previous studies focus on the lack of compliance in the Dutch construction industry with antitrust law. By contrast, this paper uses a ‘constitutive’ approach. Rather than focusing on legal compliance, I will use the theoretical framework of legal consciousness to focus on people’s understandings of law. Thus, rather than asking how much does law matter, this paper asks: how does antitrust law matter in the Dutch construction industry?

Robust Exclusion Through Loyalty Discounts

Posted by D. Daniel Sokol

Einer Elhauge, Harvard University - Harvard Law School and Abraham L. Wickelgren, University of Texas at Austin - School of Law have posted the very interesting Robust Exclusion Through Loyalty Discounts.

ABSTRACT: We consider loyalty discounts whereby the seller promises to give buyers who commit to buy from it a lower price than the seller gives to uncommitted buyers. We show that an incumbent seller can use loyalty discounts to soften price competition between itself and a rival, which raises market prices to all buyers. Each individual buyer’s agreement to a loyalty discount externalizes most of the harm of that individual agreement onto all the other buyers. The resulting externality among buyers makes it possible for an incumbent to induce buyers to sign these contracts even if they reduce buyer and total welfare. Thus, if the entrant cost advantage is not too large, we prove that with a sufficient number of buyers, there does not exist any equilibrium in which at least some buyers do not sign loyalty discount contracts, and there exists an equilibrium in which all buyers sign and the rival is foreclosed from entry. As a result, with a sufficient number of buyers, an incumbent can use loyalty discounts to increase its profit and decrease both buyer and total welfare. Further, the necessary number of buyers can be as few as three. These effects occur even in the absence of economies of scale in production and even if the buyers are not intermediaries who compete with each other in a downstream market.