722. Einer Elhauge & Abraham L. Wickelgren, Robust Exclusion Through Loyalty Discounts With Buyer Commitment, 08/2012.
Abstract: We show that loyalty discounts with buyer commitments create anticompetitive
effects beyond those possible with pure exclusive dealing. The loyalty discount
adds a seller commitment to maintain a distinction between the loyal and disloyal
price. This seller commitment reduces the seller's incentives to compete for free
buyers because the loyalty discount means that lowering prices to free buyers
requires lowering prices to committed buyers. This softened seller competition
reduces the rival's incentive to lower its own prices to free buyers. The result is
inflated prices to free buyers, which in turn inflates prices to committed buyers
because they are priced at a loyalty discount from those free buyer prices. Because
each buyer who signs a loyalty discount contract thus softens competition and
raises prices for all buyers, the result is to create an externality among buyers even
without economies of scale or downstream competition. If enough buyers exist and
the entrant's cost advantage is not too large, we prove that this externality means
that: (1) in any equilibrium, enough buyers sign loyalty discount contracts to
anticompetitively increase prices; and (2) there always exists a possible
equilibrium in which all buyers sign, completely foreclosing a more efficient rival.
As a result, the incumbent can use loyalty discounts to increase its profit and
decrease both buyer and total welfare.