Thom recently posted about Judge Alito’s comments on the recent Lepage’s decision involving bundled discounts offered to retailers. There is presently much debate among antitrust scholars regarding the proper treatment of “above-cost” price cuts, such as the bundled discounts in Lepage’s. The anticompetitive theory in these cases is not that discounts mask what is effectively “predatory pricing.” Rather, the theory is that the payments will deprive rivals from achieving minimum efficient scale for a period of time long enough to prohibit meaningful competition.
These forms of competition have attracted a good deal of antitrust scrutiny recently: slotting allowances, category management, bundled rebates, and discounts. For some thoughts on the economics of these practices, see my papers with Ben Klein on slotting and category management. How should antitrust law deal with manufacturer payments to retailers to shelve products, increase exposure, or secure promotional effort, which I collectively label: “Competition for distribution”?
Some have argued that per se legality is the correct approach to bundled rebates, but not necessary all payments for distribution. Thom’s proposed approach (among other things) requires the plaintiff to demonstrate in the context of bundled rebates that he could not have collaborated with other firms to construct a competing bundle. Others have argued for stricter scrutiny of bundled rebates, slotting allowances and payments for distribution more generally. Still others attempt to present a “unified theory” of Section 2 which would govern predatory pricing and allegedly exclusionary conduct.
In my paper (and thus the title of the post), Antitrust Law and Competition for Distribution, forthcoming in the Yale Journal on Regulation later this year, I focus on a number of economic facts regarding competition for distribution in search of guiding principles for an antitrust approach to these practices. Read below the fold for my thoughts on these economic characteristics, and what they suggest about a coherent approach to competition for distribution:
1. Payments for distribution are prevalent because of an incentive incompatability between manufacturers and retailers. Under a rather broad set of conditions, retailers do not have the incentive to provide sufficient promotional effort from the manufacturer’s perspective. The reason for this wedge in incentives derives from the fact that manufacturers of brand-name products generally have very large profit margins relative to retailer profit margins. Where this is the case, manufacturer derive large incremental profits from each additional sale created by retailer promotional effort which may stem from the supply of prime display space, a greater amount of shelf space, or other promotional activity. One expects under these conditions, that the competitive process will generate significant payments from manufacturers to retailers to induce these jointly profit-maximizing promotional activities.
2. Pass-through of payments for distribution benefit consumers. Manufacturer payments to retailers occur in several forms: bundled rebates, wholesale price discounts, cooperative marketing arrangements, slotting contracts, and more. If the retail sector is competitive, which is almost always the case as a result of low barriers to entry, these payments are passed on to consumers regardless of form. These payments create first order benefits for consumers in the form of lower prices and higher quality. A coherent antitrust policy will recognize that these payments are a form of the competitive process, namely price competition, and should be treated as such.
3. Short-term contracts are not likely to be anticompetitive. Distribution contracts of short duration are not likely to exclude rivals for a period of time long enough to stifle competition. The key economic question is whether rivals have been excluded from achieving minimum efficient scale for a sufficient period of time. Where contracts are of short duration, potential entrants can compete by offering better deals to retailers who are uncommitted or will be uncommitted in the near future.
These three characteristics of payments for distribution suggest that it is an important part of the competitive process, and that antitrust law should be sensitive to creating policy that would chill these forms of competition. I argue that because of the obvious benefits created by these payments, antitrust policy should strictly enforce the requirement that plaintiffs show an actual anticompetitive effect from the agreements, and create a number of safe harbors for agreements which economic logic tell us are not likely to be harm consumers. Specifically, I argue that though per se legality is not appropriate (since such arrangements can be anticompetitive under a narrow set of conditions), contracts under one year of duration or that foreclose less than 40% of the market should fall under a safe harbor. While one can reasonably quarrel over the precise cut offs for duration or foreclosure, both safe harbors would offer what I believe to be a significant improvement over the muddled state of distribution jurisprudence in antitrust.