Assessing the anticompetitive effects of multiproduct pricing

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• Assessing the anticompetitive effects of
  multiproduct pricing
• Dennis Carlton, Patrick Greenlee, Michael Waldman
• April 2008
• The views contained herein are my own, and do not
  necessarily reflect the views of the U.S.
  Department of Justice.

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Outline

• Review rationales and effects for linked
  pricing (bundling, tying, loyalty discounts)
• Discuss discount allocation approach for bundled
  loyalty discounts
• Present alternative approach for looking at
  linked pricing

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Rationale 1 Efficiencies in production or
selling, improved product mix

• Economies of scope
• active ingredients in cold medicine
• optional equipment for automobiles
• Preservation of quality
• Specify inputs to maintain proper function, and
  reputation
• Improved product mix in variable proportions
  settings
• durable goods and maintenance

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Rationale 2 Price discrimination

• Metering
• Durable goods and consumables
• Printers and toner cartridges
• Reducing variance of demand
• Uniform price extracts larger fraction of surplus
• Block booking of movies
• Sorting customers
• Set different prices for different bundles
• Outbound and return air flights

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Rationale 3 Increase product differentiation

• Tying a homogenous product (B) to a monopoly
  product (A) creates product differentiation
• Consumers that like A will purchase AB from
  monopolist.
• Consumers that do not like A will purchase B from
  rival firm.
• Tie/bundle allows monopolist to commit not to
  compete aggressively in B for customers that do
  not like A.

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Rationale 4 Monopolize tied good market

• One monopoly rent critique
• For two goods (A, B) used in fixed proportions,
  an A-monopolist cannot profitably create a
  B-monopoly via tying.
• Reason it can fail
• If B has uses other than with A, and there are
  scale economies with B, then tying can profitably
  exclude rivals from the B market.

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Rationale 5 Maintain tying good monopoly

• Assume the two goods are complements.

• Eliminate inferior version of tying good
• Tying denies scale to all rival sellers of tied
  good.
• This causes rival seller of tying good to exit.
• Defeat later entry into tying good
• Tying denies scale in tied good, so no entry.
• Given this, would-be entrant does not enter tying
  good market because it cannot cover fixed costs.
• Raise rivals costs
• Tied good is essential complement
• Durable goods and their maintenance

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Rationales 4 and 5 Exclusion

• These stories include economies of scale/scope
  for the entrant
• manufacturing (including fixed entry costs)
• switching costs in dynamic settings
• Absent such effect, denying sales to a rival firm
  does not alter the rivals effectiveness
• Suggests presence of scale/scope economies for
  entrant is a necessary element for such theories.

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Rationales 4 and 5 Exclusion

• What about scope economies for the dominant firm?
• Should encourage scope economies across goods
  (Rationale 1).
• Are scope economies attainable without tie?
• Balance harms and benefits?

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Bundled Loyalty Discounts

• Pricing scheme that includes tying as a special
  case
• Buyer that is X loyal in B gets a discount on
  each purchased unit of A.
• If X 100 and the undiscounted price for A
  exceeds the choke price, then the discount is
  economically equivalent to tying
• A is tying good, B is tied good
• Consumer gets A only if she buys B exclusively
  from the firm selling A

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Antitrust Modernization Commission Report

• Proposes the following approach
• Allocate discounts for bundle to the competitive
  product and check whether dominant firm sold
  competitive product below incremental cost
• Show that the dominant firm likely can recoup
  these short-term losses
• Show that the bundled loyalty discount program
  adversely affects competition

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Example

• B competitively supplied pB cB 5
• Monopolist
• charges pA 12
• loyalty program (pA 10, pB 6)
• (consumer that buys B only from monopolist gets
  discount of 2 on A)
• Applying the AMC test
• Total cost of B cB discount on A 5 2 7
• Price of B pB 6
• Since cost exceeds price, firm fails test.
• Why offer a discount of 2 on A and receive only a
  premium of 1 on B?

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Comments on AMC Approach - 1

• 1. This is a predation test
• Does cost of incremental volume exceed price?
• What is the proper increment?
• With discontinuous pricing, can often find an
  increment that is sold at a negative price.

• 2. Can construct examples where firm flunks test,
  yet surplus increases (and vice versa)
• Price discrimination
• Should not be a test, maybe a safe harbor

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Comments on AMC Approach - 2

• 3. Recoupment requirement makes no sense (or is
  vacuous)
• Loyalty discounts do not require profit sacrifice

• 4. How does one show that competition has been
  adversely affected?

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An Alternative Approach - 1

• Required elements
• Scale economies in tied good (B)
• Market power in tying good (A)
• Does the price of B increase for consumers that
  do not buy A?
• Is the rival firm still in the market? Has its
  marginal cost increased?

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An Alternative Approach - 2

• Offsetting efficiencies
• Are there scale/scope economies from tying?
• Are they not attainable in another fashion?
  tough question

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Apply to LePages

1. LePages claimed scale economies are important,
   but offered no evidence.
2. 3M has market power in transparent tape.
3. LePages offered no clear evidence about
   increased prices for tape.
4. LePages purchased by another firm (Conros),
   still selling tape.