An Antitrust Analysis of Bundled Loyalty Discounts

Economic Analysis Group Discussion Paper No. 04-13 (Revised)

43 Pages Posted: 7 Oct 2004

See all articles by Patrick Greenlee

Patrick Greenlee

U.S. Department of Justice - Antitrust Division

David S. Reitman

Government of the United States of America - Antitrust Division, Competition and Policy Section

David S. Sibley

University of Texas at Austin - Department of Economics

Date Written: October 30, 2006

Abstract

Consider a monopolist in one market that faces competition in a second market. Bundled loyalty discounts, in which customers receive a price break on the monopoly good in exchange for making all purchases from the monopolist, have ambiguous welfare effects. To analyze such discounts as predatory pricing is incorrect. In some settings, they act as tie-in sales. Existing tests for whether such discounts violate Section 2 of the Sherman Act do not track changes in consumer surplus or total surplus. We present a new test and use it in an illustrative example based on SmithKline that assumes the "tied" market is a homogeneous good. If the tied market is characterized by Hotelling competition, bundling by the monopolist causes the rival firm to reduce its price. In numerical examples, we find that this can deter entry or induce exit.

Keywords: Loyalty discounts, fidelity programs, tying, exclusive dealing, nonlinear pricing

JEL Classification: L42, L13, D43

Suggested Citation

Greenlee, Patrick and Reitman, David S. and Sibley, David S., An Antitrust Analysis of Bundled Loyalty Discounts (October 30, 2006). Economic Analysis Group Discussion Paper No. 04-13 (Revised), Available at SSRN: https://ssrn.com/abstract=600799 or http://dx.doi.org/10.2139/ssrn.600799

Patrick Greenlee (Contact Author)

U.S. Department of Justice - Antitrust Division ( email )

600 E Street NW
Suite 10,000
Washington, DC 20530
United States

David S. Reitman

Government of the United States of America - Antitrust Division, Competition and Policy Section ( email )

600 E Street NW
Suite 10000
Washington, DC 20530
United States
202-307-3714 (Phone)

David S. Sibley

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

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