Fidelity discounts and rebates not justified by the costs: in which cases should a dominant enterprise be forbidden such pratices?
1) Definition of fidelity discounts
The question refers to fidelity discounts. “Fidelity” identifies a sub category of discounts, intendedto provide either implicit or explicit compensation for loyalty (you buy only from me). In theory, “fidelity” discounts should be distinguishable from “quantity” discounts, the other sub category of discounts, where a seller provides compensation for large purchases. In practice, the distinction between “fidelity” and “quantity” discounts is much less clear, largely indirect and based on the “objective” justification of the provided discounts. If discounts are objectively justified (strictly cost based)then discount enhances fidelity only indirectly, since the discount passes down to customers the cost reductions originating from the purchase. In such cases discounts are unlikely to be considered fidelity discounts (see also point 2)
1.1Are you aware of any decision/judgement in your jurisdiction providing a definition of “fidelity” discounts as opposed to other types of discounts? Please describe
Fidelity discounts have been dealt with by the Spanish competition authority in a number of cases, the most relevant of which are Roca Radiadores[1], COFAS[2], Iberia[3], Suresa - Correos[4] and ASEMPRE/Correos[5].
The authorities havetraditionally referred to the Community case-law in this field[6] and havedrawn a distinction[7] between mere quantity discounts -associated to the volume of purchases carried out by the client- and loyalty discounts -which compensate those clients that buy a certain percentage (or the totality) of their total purchases from the same seller-. Loyalty discounts have in the past been assimilated to exclusivity clauses and, when carried out by dominant firms, beentraditionally considered in practice a per se restriction.
This distinction between quantity and loyalty discounts has been quite obvious in some of the above-mentioned precedents. In COFAS, for instance, the discount was granted to pharmaceutical retailers that acquired more than a certain percentage of their total potential purchases from the same supplier, the pharmaceutical cooperative COFAS.
In ASEMPRE/Correos, the Spanish incumbent postal company -Correos- agreed to grant certain compensationsto large clients which had previously committed to deliver a certain amount of mail. Although this amount was expressed in absolute figures and not in terms of percentage over their total amount of deliveries, the Spanish authority considered that it constituted, in practice, the entire amount of mail that these companies could possibly issue.
In both cases it was doubtless for the authority that the agreed compensations had, expressly or implicitly, a fidelity element.
The reasoning of the authority gets more interesting in those cases in which the distinction between pure quantity discounts and fidelity discounts was less obvious. A good example is the Iberiadecision, a case concerning incremental discountsgranted by the main Spanish carrier to travel agencies. The compensation package was granted to travel agencies which achieved a certain increase in their sales of Iberia tickets with reference to the preceding year. Thus, a 0.75% bonus was automatically granted in case of an increase of at least a 3% in sales. This bonus would grow in proportion to the rate of the sales increase up to a maximum of 5%, the specific growth rate and parameters being individually agreed with each travel agency. In this case, the promotion was clearly not linked to the total amount of transactions carried out by the agencies. However, the authority, took the view that the compensation constituted a loyalty discount in consideration of the following circumstances:
-Firstly, the magnitude of the compensation, which could eventually constitute an important proportion of the total price received by the agencies (the bonuses could reach a 5% value, compared to the 7.5% value of the ordinary commissions). According to the authority, this created a strong incentive for the agencies to “drive” their sales to Iberia.
-Secondly, the fact that the compensation could not be justified on the basis of a cost reduction, since the flight ticket reservations was carried out electronically.
-Thirdly, the opacity in the market, which incentivated travel agencies to try to sell more Iberia flights and to conceal to their clients the offers or prices from other operators.
In Iberia, therefore, the “fidelity” element of the discount is not made dependant on the linkwith the total amount of purchases of the client, but rather on other factors, in particular the fact that the compensation could not be objectively justified in terms of costsand the ability for the incentive to drive other competitors out of the market, that is,to generate a loyalty effect.
2) Cost justification
The problem is that the a cost justification is presumed whenever discounts are directly proportional to quantities purchased in a given period (usually a year). This is not always appropriate. A cost justification may exist if a single order is placedat the beginning of the production period, whiledeliveries are distributed in the course of the year (reduction of demand uncertainty). A cost justification may also exist if delivery of all quantities purchased occursin a single instalment (reduction of transportation costs). On the other hand, if the quantity that triggers a discount is achieved by unplanned purchases made in the course of a year, a cost justification is much more difficult to identify.
2.1Are you aware of any decision/judgement in your jurisdiction discussing evidence of the cost justification underlying a discounting policy? Please describe
The practice of Spanish authorities have been quite restrictive in this regard. There are no decisions by competition authorities in which a discounting scheme based on fidelity has been considered justified on grounds of costs efficiencies. Likewise, no detailed discussions in this regard are contained in the Spanish precedents. However, the above-mentioned cases show that, at least in theory, the authorities would be prepared to consider such a justification if it was the case.
In Iberia, for instance, the Spanish authority clearly suggests that a cost reduction could justify the application of these types of discounts. Indeed, in this case one of the arguments of the Spanish authority in considering the abusive character of the incremental discounts was the fact that,as the flights reservations were carried out by the agencies electronically, without any element of physical transportation involved, no cost reduction could be claimed[8].
In ASEMPRE/Correos, which concerned discounts offered to companies that delivered the totality of their mail through Correos, the enquiry body of the authorities stressed the fact that the discounts offered by Correos were unrelated with reductions in unitary costs that could eventually take place when increasing the volume of mail sourced[9].
Also in COFAS, involving a straight-forward loyalty discount, the authority leaves the door open to possible cost justifications, indicating that this conduct could be legitimate if it was carried out “by means of transparent methods based on efficiency grounds”[10].
3) Price discrimination
“Fidelity” discounts are meant to compensate exclusive purchasing patterns. Therefore “fidelity” discounts are inherently discriminatory. A purchase of 100 units may trigger a discount if the supplier covers all the needs of the acquirer for that particular product, otherwise the acquirer may not receive any discount (and pay a higher price than its competitors). This implies that acquirers of the same quantities may face different prices.
3.1In your jurisdiction mayprice discrimination by a dominant firm violateantitrust law? If so,how is this discrimination defined? In particular, is this discrimination prohibited per se or only inasmuch as it actually distorts competition in the market? Please describe
Article 2 of the Spanish Competition Law[11]-equivalent to Article 82 of the EC Treaty- lists,among the examples of prohibited abuses, the applicationof dissimilar conditions toequivalent transactions, thereby placing some competitors at a disadvantage comparedwith others. This conduct includes the application of discriminatory prices provided that the customers are competitors among themselves. However, even discriminatory prices applied to clients which are not competitors (e.g., to consumers) are encompassed in the general prohibition of Article 2. This discrimination may take the form of more favourable tariffs or prices but can also be instrumented through other advantages in the commercial terms offered to client[12]. Price discrimination conducts are typically encountered in situations where the dominant company offers its services or sells its products to other competitors in downstream or closely related markets[13].
Traditionally, Spanish authorities have followed an “intention” doctrine, as opposed to an effects approach. According to this line of thought, it is not necessary for exclusionary practices (such as price discrimination, loyalty discounts, exclusivity clauses) to actually produce any foreclosing effects, the decisive elements being the intention and the nature of the conduct in itself. In its landmark decision in Planes Claros[14], which concerned a campaign of discounts in the tariffs of national and international telephone calls offered by the Spanish incumbent operator, the authorities declared that the intention to foreclose the market and the nature of the conduct (typically disloyal) were the key elements to qualify this conduct as an abuse of dominance. On the contrary, the authorities judged irrelevant the fact that the effects of the campaign on competitors or on the final consumers had not been proved.
Although there have been some exceptions to this “intention doctrine”[15], the question seems to have been settled -at least for the moment-by the Supreme Court in its judgement annulling the TDC’s decision in the Planes Claros case[16]. In its judgement, the Court clearly stated that the intention could not constitute the decisive element to fine a company for abuse of dominant position. According to the Court it is the “objectively abusive nature of the conduct” that triggers the application of sanctions. The intention of the dominant firm, therefore, is a necessary element, but it is not sufficient in itself for the abusive conduct to exist. The court expressly accepted that, even in caseswhere there is a clear intention to foreclose the markets, this would not be questionable as long as the conduct is carried out through legitimate means.
In practice, following this judgement, the test the competition authorities have been applying is to analyse whether the conduct in question is objectively capable to foreclose competition (something which,in practice, could be considered quite similar to an effects approachtest). To this effect it is quite revealing the decision in Tarjetas Prepago Telefónica[17]in which the authority seems to adopt again an effects test approach when rejecting the complaint since “it was not sufficiently proved that the relevant conducts had any effects on the market”.
In most jurisdiction price discrimination may only be prohibited when put in place by a dominant firm, i.e.dominance being a necessary but not sufficient condition for a prohibition. However in some jurisdictions price discrimination may be prohibited also when put in place by non dominant firms.
3.2Are there rules in your jurisdiction that prohibit price discrimination irrespective of the market power of the firm involved? Can you briefly describe these rules and discuss how they are interpreted?
Article 2 of the Spanish Competition Law sanctions abusive conducts as long as they are put in place by dominant firms. However, Spanish Law provides for other alternative instruments to sanction price discrimination when carried out by non-dominant firms. Indeed, according to Article 16(1) of the Unfair Competition Law[18], the discriminatory treatment of consumers in terms of prices or other sales conditions will constitute an act of unfair competition, unless this discriminatory treatment can be objectively justified.Likewise, Article 16(2) considers an unfair actthe abuse by a firm of the situation of economic dependence of its clients or suppliers that do not have an equivalent alternative to carry out their activities. This is presumed to be the case when, in addition to the usual discounts or commercial conditions, a company is obliged to grant regularly to a certain client some additional advantages that would usually not be given to an equivalent purchaser.
The Unfair Competition Law seeks to satisfy principally private interests. For this reason, acts of unfair competition may be challenged before the courts by those parties that have been directly harmed or are directly threatened and, in certain cases, also by consumer associations and industry or sectorial organisations. In particular, the affected parties may ask the judge, inter alia, to order the cessation or prohibition of the act, the removal of the effects produced by the acts and, in cases of fraud or negligence, the payment of the damages caused.
In addition, in so far as these unfair acts distort free competition and as a consequence affect public interests, the competition authority may also impose the administrative sanctions foreseen in the Spanish Competition Law[19].
4) Exclusionary nature of “fidelity discounts”
Discounts can be exclusionary when they do not allow competitors to profitably compete with the discounting dominant firm. However there are a number of problems associated with this exclusion. The first one relates to the burden of proof. Is indirect evidence (e.g. the fact that competitors market shares were not affected) sufficient to rule out any exclusionary effect?
4.1In your jurisdiction is indirect evidence that market shares of competitors (and especially market shares of complainants) were not affected by the discounting policy sufficient to rule out its allegedly exclusionary effect? Please describe
Although traditionally loyalty discounts have been considered a per se restriction by Spanish authorities, there are examples of a more pragmatic approach. In particular, in Airtel/Telefónica[20], the authority expressly acknowledged that the evolution of the market share of the dominant firm and competitors/new entries constitute an indicia of the existence of abuse[21]. More recently, otherdecisions on abuse, although not strictly in the field of discounts, show that the market presence of the dominant firm and other competitors is one of the elements that will be taken into account in order to determine whether a certain conduct satisfies the test of being “objectively capable to foreclose competition”, as required by the jurisprudence. In Tarjetas prepago[22], a case concerning certain exclusivity arrangements entered into by the incumbent telecoms operator with distributors of prepaid telephone cards, the authority expressly analysed the effects on the market segment affected by the alleged abusive conducts. More specifically, in Preparados farmacéuticos[23], concerning the application of predatory prices, the fact that the complainant had indeed increased its market share during the period in which the conduct had been put in place by the dominant firm was one of the elements which led the authority to reject the claim.
It is not clear however, whether the mere fact that the market shares of the competitors have not been affected by the discounting policy would be enough for the authority to qualify the discounting policy as non-abusive. This is so because the current test applied by the authorities concerns the policy’s objective capability of foreclosing competition,which could lead the authority to the conclusion that the discounts could potentially produce certain effectsin the relevant markets even if such effects have not actually taken place.
In order to assess whether a fidelity discounts strategy is actually exclusionary, competition authorities may need to assess whether the practice is replicable by competitors. Replicability depends on whether matching the pricing strategy of the dominant firm would lead competitors to price below some measure of costs. Therefore, it is necessary to assess whether, as a result of discounts, prices fall below some measure of costs (average variable, average total, incremental or marginal). Furthermore, as for predatory prices, the assessment could be made over the cost of the dominant firm, or, alternatively, over the relevant costs of competitors.
4.2In your jurisdiction is the exclusionary nature of discounts proved through a comparison of costs and revenues? If not, how else is such exclusion assessed?
In the precedents discussed above, the following elements have been considered by the authorities in order to determine the exclusionary effect of the abuse on loyalty discounts:
-The structure of the markets, in particular the number of competitors and real possibilities of new entries.
-The characteristics of the market (for instance, in markets with low degree of transparency there is an incentive on distributors to favour the sale of products over which they obtain a discount, concealing offers and products from alternative suppliers that the final clients will never get to know)[24].
-The magnitude of the discount and in particular its relationship with the total price of the product[25].
-The relationship between the discounts granted and the reduction in unitary costs that would be allegedly saved as a result of an increase of volume (if the discounts are clearly higher than the cost efficiency, the discount would be considered exclusionary)[26].
-The period of liquidation of the discount (a too long period of liquidation would generate an excessive pressure on the purchaser at the end of the period to buy the products from the supplier granting the discount thus impeding purchases from alternative suppliers)[27].
Spanish jurisprudence provides some indication in relation to abuses linked to costs in relation to predatory prices. In these cases, and following the Community case law[28], prices have been presumed as being abusive when they are below the average variable costsof the dominant firm. On the contrary, prices below average total costs but above average variable costs are considered abusive only if they are part of a plan for eliminating a competitor[29].
4.3Should your jurisdiction perform a comparison of costs and revenues, what is the definition of costs that is used, average variable, average total, incremental or marginal? Please describe
See question 4.2 above.
4.4Furthermore in your jurisdiction are the relevant costs over which the comparison is undertaken the costs of the dominant firm or the cost of the excluded competitor? In any case are there instances where an above costs abuse was identified in your jurisdiction? Please describe