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Conditional pricing practices

Definition: conditional pricing occurs when a firm offers a price with a condition.

Share/loyalty discounts (S1/C3/S2) (ZF Meritor):

  • (1) Price-cost test: if price is the driving force behind the exclusion, then apply Brooke Group (predatory pricing)
  • (2) If Brooke Group doesn't apply, then assess whether the practice is exclusionary under Tampa Electric (exclusive dealing/substantial foreclosure)
  • (3) Even if the price-cost test does not directly apply, a court must still decide what persuasive authority (if any) the price-cost test has under the Tampa Electric (substantial foreclosure) standard

Definitions and context:

Share/loyalty discounts (S1/C3/S2):
  • If you purchase X% or more of goods from me, then you get a Y% discount
    • Equivalently: if you purchase less than X% of goods from me, then you get a Y% penalty
  • Extreme cases look like exclusive dealing and predatory pricing:
    • Exclusive dealing (Tampa Electric): X = 100, Y = large penalty
    • Predatory pricing (Brooke Group): X = 0, Y = large discount
  • Enables firms to exclude competitors without pricing below cost: monopolist offers buyer the option to buy 100% of their goods from them for $10 or pay $11 otherwise. Another seller can supply 10% of goods for $9. The average cost of buying solely from the monopolist is lower than the average cost of buying from the monopolist and the other seller, so the other seller will be excluded from the transaction.

Caselaw​

ZF Meritor LLC v. Eaton Corp. (3rd Cir. 2012) (modern conditional pricing test)​

  • Holding: D's conditional pricing was anticompetitive under Tampa Electric
    • Price-cost test can be used as a specific application of the rule of reason when:
      • (1) P alleges that price is the vehicle of exclusion OR
      • (2) Evidence suggests that price is the "clear driving force" behind exclusion
    • If not, then Tampa Electric applies and the test is whether the probable effect of the conduct was to substantially lessen competition
    • Here, price is not the clear driving force behind P's exclusive dealing claim:
      • One of D's goals in introducing the LTAs was to supply the market
      • Some aspects of exclusion here weren't price related: data book, long-term length of the contract, threat of withdrawing supply
    • Thus, apply Tampa Electric (prima facie case):
      • Anticompetitive effect: foreclosure is likely and can be effective
        • Nature of the market: (1) highly concentrated (economies of scale enable transmissions to be produced cheaply to meet market demand) with (2) entry barriers (making transmissions is technologically difficult) where (3) OEMs rely heavily on D
        • Anticompetitive conduct: LTAs foreclosed 90% of the market by forcing 90% of the market to transact with D
        • Non-price exclusion: took place through the data books
    • D's procompetitive justifications:
      • LTAs were necessary to supply the market (Court rejects)
      • Price behavior was just aggressive competitive behavior (addressed in dissent)
    • Policy: concerned about exclusion through non-price restraints; want to promote entry into transmission market to give buyers more choices
  • Dissent:
    • D's low prices are precisely what caused the OEMs to enter into the LTAs
    • Pricing was above cost, which implies a high barrier to P success and demands Brooke Group (price-cost test) to at least have persuasive effect
    • No evidence of coercion or that D would have refused to supply OEMs
    • Antitrust is supposed to protect competition, not competitors
    • Policy: worried about chilling price competition
  • Facts: sole manufacturer of heavy-duty truck transmissions in North America (D) sells transmissions to four truck manufacturers. A competing transmission manufacturer (P) enters the market and grows its share of sales to 17%. D responds with new long-term agreements (>5 years) with each original equipment manufacturer (OEM).
    • LTAs:
      • Conditional pricing: OEM receives a rebate if it agrees to purchase a minimum percentage of its requirements from D
      • Non-price: D required to be the standard offering in the OEM data book
      • Non-price: 2/4 LTAs require competitor's products to be removed from data books
      • Conditional pricing: OEMs are required to preferentially price D's transmissions relative to competitor's equivalent transmissions
      • Conditional pricing: competitiveness clause allowed OEMs to purchase from D's competitors if they make a price or quality offer that D could not match
    • After the LTAs:
      • P experiences quality problems in its automatic transmission lines
      • D always prices below P but never below cost
      • P determines that LTAs limit its market share and dissolves its joint venture
      • P exits heavy-duty transmission market in 2007 after shares drop to 4%