The Federal Trade Commission (FTC) and United States Department of Justice (DOJ) hosted a workshop on June 23, 2014 discussing the law and economics of “conditional pricing” programs.  Most panelists were academics, including economists and law school professors.  The bulk of the presenters advocated a more aggressive posture towards these arrangements than the courts have recently adopted.

Conditional pricing programs.  Conditional pricing generally encompasses pricing, discounting and contracting practices in which a company’s prices charged will vary depending upon the level of purchases the customer makes from the company’s competitors.   Examples include:

• Bundled discounts: Supplier X, which sells dominant product A and competitive product B, grants a discount on product A (which the customers have to buy) so long as customers buy a certain percentage of their needs of product B from Supplier X, rather than from its competitors.
• Loyalty / market share discounts: Supplier X, which has a dominant position in product A, grants discounts from its baseline pricing if customers purchase a high percentage (e.g., 90 percent) of Product A from Supplier X, rather than from its competitors.

Theories of harm.  The panelists discussed two basic categories of theories of competitive harm.

• Exclusion of rival manufacturer.  When a smaller rival, perhaps a new entrant, tries to break in to a market, the dominant incumbent may impose a conditional pricing program that makes it hard for the new entrant to get a significant share of sales, which may deprive it of critical scale efficiencies and render it a marginal supplier, or perhaps even force an exit.
• Coordination / collusion of customers / distributors.  A retailer can be viewed as providing retailing services in the sale of the manufacturer’s products.  The purchases and contracts different retailers receive from manufacturers can be thought of as inputs in the retailer’s provision of its services.  Some of the economists stated their view that customers who may desire to coordinate their behavior as sellers can use conditional pricing programs from their suppliers to ensure that the input costs are comparable, which can reduce competition among retailers.  For example, the conditional pricing program may ensure that no retailer switches over from the dominant supplier to the new entrant with a lower cost product.  Keeping the customers from switching to the new entrant may make it easier to achieve or maintain coordination.

Relevance of cost based tests.  The panel addressed cost-based safe harbors in great detail, with most of the economists opining that they were simply not helpful.  The issue is whether conditional pricing programs that result in a product being sold “above cost” should fit within a safe harbor. 

• Legal background.  This discussion starts with the Supreme Court’s Brook Group case, which found that above cost pricing cannot create liability under a predatory pricing theory.  In cases involving bundled /multiproduct discounts, there has been a circuit split with the Third Circuit (LePage’s) allowing liability even if prices are above costs, and the Ninth Circuit (Peace Health) holding that above [...]
  
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