Object reference not set to an instance of an object.
Publications

Bundling discounts

01 July 2008

Some recent developments have brought greater certainty to the question of how bundle discounts should be treated in competition law. In particular, the Commerce Commission has set out the way it will analyse bundle discounts. Also, there have been two significant US developments – a report by the Anti-Trust Modernisation Commission and the PeaceHealth Decision of the Ninth Circuit Court of Appeal.

The issue with bundle discounts

A firm offers a discount if a number of products are purchased as a bundle. Each product can be purchased individually but the consumer enjoys a greater discount if he/she buys the bundle. A competitor supplying only a few products, or a single product, complains that it cannot compete. Is the bundle anti-competitive, or is the complaining firm inefficient?

While it feels like this kind of discount could be used for anti-competitive purposes, bundles are regularly offered, by small and large firms, for a range of legitimate commercial reasons, to the benefit of consumers.

What rule should be used to distinguish ordinary commercial conduct from anti-competitive conduct? And can we frame the rule in terms sufficiently plain and simple so that firms know where they stand and competitive conduct is not deterred?

The Commission’s approach

Accusations of anticompetitive bundling have been particularly prevalent in telecommunications markets. Vodafone has recently been criticised for offering attractive broadband bundles (although not by consumers, of course). And the Commission recently grappled with these issues when investigating competitively priced bundles sold by Telecom. The Telecom bundles included one product over which Telecom had market power – residential local lines – and two competitive products – broadband and tolls. Telecom offered a $10 discount if all three were taken together.

The Commission’s test

The Commission concluded that the proper approach was to apply the total discount on the bundle (i.e. $10) to the competitive services in the bundle (i.e. broadband and tolls) and ask whether Telecom’s revenues were above costs for the competitive services taken as a whole.

Put another way, could a competitive firm with the same costs as Telecom and supplying all the competitive services in the bundle compete with the bundle?

The Commission found Telecom’s bundles passed this test, and terminated its investigation.

Tests rejected by the Commission

Equally important were the potential tests rejected by the Commission.

First, a test that applies the total discount on the bundle to just one competitive service in the bundle – i.e. that asks whether a supplier of just one of the competitive services can compete with the bundle – is too restrictive. The Commission called this the "stand alone" test.

Such a test would hold an incumbent to a higher standard than its competitors, who could offer a bundle discount over a number of competitive services without having to worry about whether a firm supplying only one competitive service can compete with the bundle. This would prevent pro-competitive bundles that make consumers better off.

Second, a test that simply compares the total revenue and cost of the bundle as a whole may be too permissive, where one of the products in the bundle is a monopoly product. This test could permit bundles that an equally efficient rival, competing in all relevant competitive markets, could not match.

US developments

Progress has also been made in the US toward clearer rules on how to evaluate bundle discounts.

The Anti-Trust Modernisation Commission, set up specifically to review US anti-trust law, proposed a three-part test in respect of bundle discounts. A plaintiff would be required to show each of the following:

  • after allocating all discounts and rebates attributable to the entire bundle of products to the competitive product, the defendant sold the competitive product below its incremental cost for the competitive product

  • the defendant is likely to recoup these short term losses

  • the bundled discount or rebate programme has had or is likely to have an adverse effect on competition.

In September last year, the Ninth Circuit Court of Appeal took the lead from the AMC in its PeaceHealth decision, and proposed the following test:

A plaintiff who challenges a package discount as anti-competitive must prove that, when the full amount of the discounts given by the defendant is allocated to the competitive product or products, the resulting price of the competitive product or products is below the defendant’s incremental cost to produce them. This requirement ensures that the only bundled discounts condemned as exclusionary are those that would exclude an equally efficient producer of the competitive product or products.

There is some ambiguity in the PeaceHealth decision as to how the Court would have approached a situation where a provider of only one competitive product complained that it could not compete with a bundle, in a situation where the plaintiff could compete with the bundle if it chose to expand into other competitive products also covered by the bundle. Some statements by the Court indicate that it would examine the bundle further.

As discussed above, this approach is likely to deter pro-competitive and consumer welfare enhancing bundles, and was rightly rejected by the Commerce Commission. In any event, the court did not have to directly decide the issue in the PeaceHealth decision (the plaintiff supplied all possible competitive services) and, as is shown in the quote above, the Court gave its decision in broader terms.

Comment

The Commission’s report brings some welcome clarity to the area. In particular, the rejection of the stand alone test.

An aspect that we expect to receive attention in the future is whether the Commission’s test should act as a bright line boundary or a filter. In other words, whether a bundle that fails the Commission’s test is for that reason alone treated as in breach of the Commerce Act (which is the indication in the Commission’s report) or whether this triggers further scrutiny of the commercial justification for the bundle.

Bundles might be positioned in a pro-competitive fashion as loss-leaders. Or in response to loss-leading by others. More generally, given the role of bundles in facilitating legitimate price discrimination and unlocking additional demand, there is a concern that limiting the competition analysis to the costs and revenues of the competitive aspect of the bundle may overlook these legitimate commercial objectives and incremental revenue.

Contacts