2 - Price Discrimination and Single-Product Rebates

Summary

Introduction

Chapter 1 deals with predatory pricing, that is, typically, low prices offered by a dominant firm across the board, to all of the customers who are buying a certain product at a given point in time. In this chapter we discuss, instead, the possible exclusionary effects of price discrimination in its various forms (including different types of rebates and discounts).We also suggest, based on the economic theories reviewed, a possible approach that competition authorities may want to follow when considering instances of potentially anti-competitive rebate schemes. Differently from predation, in this chapter we focus on low prices offered to specific buyers, or for specific units demanded by buyers. Some forms of price discriminationmay also be conditional on buying different products, but we shall deal with bundled discounts in Chapter 4.

This chapter proceeds as follows. In Section 2.2 we first define price discrimination and discuss its welfare effects in general, that is, when exclusion is not an issue. In Section 2.3 we study the circumstances under which a dominant incumbent firm may use price discrimination (in its different forms) to exclude a rival, and show that the more individualised and targeted the discrimination the more likely that it will have exclusionary effects all else equal. In technical Section 2.4 we formalise the analysis of exclusionary discrimination. In Section 2.5 we draw policy implications from the theory. In Section 2.6 we discuss key decisions by competition authorities and landmark case-law. Finally, in Section 2.7, we discuss a few antitrust cases investigated in different jurisdictions and seek to interpret them in light of some of the models reviewed in this chapter.

Price Discrimination,Welfare and Efficiencies

Forms of Price Discrimination

Price discrimination consists of different consumers paying different unit prices for the same good, when it costs the firm the same amount to produce and serve these consumers (or, more generally, when prices are at different ratios to marginal costs). It is a very widespread phenomenon and in practice it may take different forms, as we shall discuss below.

Economists typically distinguish three types of price discrimination. First-degree price discrimination refers to a theoretical situation in which a firm knows exactly each consumer's valuation (or willingness to pay) for its product and charges her the price which equals her valuation, thereby extracting all her surplus.