bundling, discounts, and related practices · bundling, discounts, and related practices...
TRANSCRIPT
Bundling, Discounts, and Related Practices
Pro-competitive, anti-competitive, and neutral economic effects
David Matthew
Associate Director
Bucharest
20 October 2011
Overview
� Different practices; similar theme
� Example 1: Bundling
� Example 2: Conditional Rebates
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� Example 2: Conditional Rebates
� Concluding remarks
Different practices…
… but similar theme
Exclusion v Efficiency
“Exclusionary Conduct”
� Predation
� Exclusive dealing
“Pro-Competitive conduct”
� Low prices
� Efficient price structures
3
� Conditional rebates
� Tying/bundling
� Respond to customer demands
� Improve on monopoly
Many forms of conduct could be
exclusionary in intent or effect,
pro-competitive, or both…
Example 1: Bundling in Pay-TV
Bundling – Efficiency Justifications
� All products are a “bundle”– consumer demand for convenience
– scale economies
There are many, e.g.
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– scale economies
– Adam Smith…
� Asymmetric information
� Free riding on reputation
� Efficient pricing … or “price discrimination”
Bundling as Exclusion –Some Theories
� Commitment device; leads incumbent to price aggressively
– Rivals don’t enter
� Bundling to block “stepping stone” entry
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� Bundling to block “stepping stone” entry
� Irreversibility
Example: Football on TV
� Alex supports Barcelona
– Will pay 10 to see Barcelona and 1 to see Real Madrid
� Thomas supports Real Madrid
– Will pay 10 to see Real Madrid and 1 to see Barcelona
No Bundling
7
No Bundling
� Price (Barcelona) = 10, only Alex buys
� Price (Real Madrid) = 10, only Thomas buys
Bundling
� Price (Barcelona & Real Madrid) = 11, both Alex and Thomas buy
– Output increases
Example: Football on TV
� The Valencia rights come up for auction
– Jessica values Valencia=5, Barcelona=3 and Real Madrid=3
� If incumbent buys rights, he can sell Jessica the
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� If incumbent buys rights, he can sell Jessica the bundle for 11
� If a new entrant buys rights, he can only sell Jessica the Valencia matches for 5
Example 2: Conditional Rebates
Conditional Rebates
� Retrospective rebates – e.g. obtain lower price on allunits if purchase more than a threshold
� Lowers effective price offered at margin
– Encourages higher purchases by customer
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– Encourages higher purchases by customer
– Entrant must offer lower price to pick up marginal sales
Illustrative Example
� Firm offers customer price schedule:
– Pno rebate if purchase < threshold
– Prebate on all purchases if purchase > threshold
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Prebate
Rebate Threshold
Pno rebate
B
A
Discount and Volume Expansion (1)
12
Marginal
Cost
Qno rebate
Qrebate
Consumer gains if A>B
Prebate
Rebate ThresholdP
no rebate
A
Discount and Volume Expansion (2)
13
Marginal
Cost
Qno rebate
Qrebate
B
Producer gains
Prebate
Rebate Threshold
Pno rebate
“Effective price” > Marginal Cost
Customer loss
Compensation
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Marginal
Cost
Qno rebate
Qrebate
Entrant compensates, still makes profit
“Captive” “Contestable”
Profit
Prebate
Rebate ThresholdP
no rebate
“Effective price” < Marginal Cost
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Marginal
Cost
Qno rebate
Qrebate
“Captive” “Contestable”
Profit
LOSS
Entrant compensates, but makes loss
Concluding Remarks
Concluding Remarks
� Key question is how to distinguish between exclusion and pro-competitive conduct
� EC Guidance on Enforcement Priorities (2009)
– Increased emphasis on economic/market effects
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– Increased emphasis on economic/market effects
– Influence of economic theory� Irreversibility
– Recognition of importance of efficiency justifications� Apply Article 101(3) conditions to exclusionary conduct
– Price cost tests� Extension of predation price-cost tests to other forms of exclusion
Watch this space
Contact UsContact UsName
David MatthewNERA—London+44 20 7659 [email protected]
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