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STAND ON REBATES? An economic view on rebates and competition Dr. - - PowerPoint PPT Presentation

Apr 15, 2023 187 likes •526 views

WHERE DO WE STAND ON REBATES? An economic view on rebates and competition Dr. Henrik Ballebye Okholm and Torben Thor Pedersen 17 January 2018 1 2 COMPETITION ECONOMICS CALLS COMPETITION LAW AND ECONOMICS FOR AN EFFECTS-BASED APPROACH

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SLIDE 1

WHERE DO WE STAND ON REBATES?

An economic view on rebates and competition

17 January 2018

  • Dr. Henrik Ballebye Okholm and Torben Thorø Pedersen
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SLIDE 2

1 2 3 4

COMPETITION ECONOMICS CALLS FOR AN EFFECTS-BASED APPROACH COMPETITION LAW AND ECONOMICS ARE BECOMING MORE ALIGNED SCREENING FOR POSSIBLE ILLEGAL REBATES QUESTIONS AND DISCUSSION

2

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1

COMPETITION ECONOMICS CALLS FOR AN EFFECTS-BASED APPROACH

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SLIDE 4

A helicopter economic view on rebates and competition

Where do we stand on rebates? 4

…. I will take on my thermal head camera….. …. a scan for effects on competition.

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SLIDE 5

Where do we stand on rebates? 5

  • Large firms with market

power

  • Small firms with no

market power

  • Most firms (99,9%?) giving

rebates have no or limited market power

  • Rebates are in the DNA
  • f a business man
  • Why?

Rebates are used in all competitive industries and all types of firms

Common examples

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SLIDE 6

Rebates are a powerful tool to attract marginal customers – especially secret rebates

Where do we stand on rebates? 6

General price reduction Rebate

Total

  • tal

sold sold units units Pr Profit fr

  • fit from
  • m

alr already s eady sold

  • ld

units units Total

  • tal

pr profit

  • fit

?

Rebate Br Breakeven sales sales inc increase se 25% 33% 40% 67% 50% 100% Rebate Br Breakeven sales sales inc increase se 25% >0% 40% >0% 50% >0%

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SLIDE 7

Rebates are effective to implement price discrimination…

Where do we stand on rebates? 7

Whic hich h reba bates? tes?

Individual rebate based

  • n willingness to pay

Self-selection schemes, e.g. airport parking Rebates offered to certain customers groups, e.g. students and elderly people

Student Enterprise Home user

Pr Prod

  • duc

ucer er Pr Prod

  • duc

uct Custome ustomer

  • 1. DEGREE
  • 2. DEGREE
  • 3. DEGREE

Type ype

Price1 Price2 Price3 Price1 Price2 Price3 Price1 Price2 Price3

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SLIDE 8

Task

  • Sell airport parking to three

customers

  • No variable costs
  • Goal: Maximise profit

Price discrimination can increase sales when secret rebates are not possible

Bo Ole Ib

Willingness to pay

300 200 100

Where do we stand on rebates? 8

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SLIDE 9

Task

  • Sell airport parking to three

customers Solution 1: One price

  • Optimal price = 200 DKK
  • Revenue = 400 DKK

Problems?

  • Bo could be charged a higher price
  • Ib would buy at a lower price

Price discrimination can increase sales when secret rebates are not possible

Price

Higher price is possible More sales is possible

Willingness to pay

Bo Ole Ib 300 200 100

Where do we stand on rebates? 9

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SLIDE 10

Price discrimination can increase sales when secret rebates are not possible

Price 2 Willingness to pay

Bo Ole Ib 300 200 100

Price 3 Price 1 Task

  • Sell airport parking to three

customers Solution 2: Individual prices

  • Optimal prices = 300, 200 and 100

DKK

  • Profit = 600 DKK

Problems?

  • The customers may not accept this

pricing

  • How do we find out what much the

customers will pay?

Where do we stand on rebates? 10

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SLIDE 11

Price discrimination can increase sales when secret rebates are not possible

Rebate 1 Rebate 2

Willingness to pay

Bo Ole Ib 300 200 100

Price Task

  • Sell airport parking to three

customer Solution 3: 1 price, 2 rebates and let the costumer chose

  • Optimal price = 300 DKK in airport
  • Rebate 1: Away from airport
  • Rebate 2: Budget parking far away
  • Profit = 600 DKK

Advantages?

  • Higher price (Bo pays 300 DKK, not

200 DKK)

  • Higher sales (Ib buys now)

Where do we stand on rebates? 11

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SLIDE 12

Copenhagen Airport’s parking products

Where do we stand on rebates? 12

Ib Ole Bo

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SLIDE 13

Firms can use rebates to realise efficiencies

Where do we stand on rebates? 13

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SLIDE 14

Where do we stand on rebates? 14

Rebates create incentives to concentrate purchases on one supplier only

  • 100
  • 80
  • 60
  • 40
  • 20

20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

1.600 1.280

200 400 600 800 1.000 1.200 1.400 1.600

+25% Split on two suppliers One supplier

Marginal unit price, EUR Total price @16 units, EUR

Example: 20% retroactive volume rebate above threshold of 9 units

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If strong enough, this incentive may foreclose rival firms

Where do we stand on rebates? 15

17 Janua ry 2018

Sup Supplier plier 1

Supplier 2

Downstream 1 Downstream 2

Offer rebates No rebates

Predatory pricing Loyalty effects Bundling

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SLIDE 16

Where do we stand on rebates? 16

…other are more complex Some are simple…

Rebate schemes may be complex and difficult to understand

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SLIDE 17

Complex rebates can harm competition through lack of transparency

Where do we stand on rebates? 17

+ =

Final price

Should rebates be public?

?

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SLIDE 18

Pr Pro-competit competitiv ive ef e effects ects Ant Anti-competit competitiv ive e ef effects ects

Conclusion: The pros and cons of rebates should be balanced. Rebates should be assumed pro-competitive unless the

  • pposite is shown…..

Where do we stand on rebates? 18

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SLIDE 19

…and harm to competition should be tested

Stage 1

  • Formulate

theory of harm

Stage 2

  • Test theory of

harm

Stage 3

  • Draw

conclusion about effect on competitor

Where do we stand on rebates? 19

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SLIDE 20

2

COMPETITION LAW AND ECONOMICS ARE BECOMING MORE ALIGNED

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The two approaches to rebates

Case ase law law: : Form-ba based sed app pproa

  • ach

Enforcement paper and Intel: Effects-based approach Whe here e do do we e stand stand in in 2018? 2018?

Where do we stand on rebates? 21

2009 2009

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The As-Efficient-Competitor (AEC) test

Question: Can the dominant firm take its own medicine?

Would the dominant firm survive, if it had to fight a competitor with the prices and rebates used by the dominant firm?

Why?

  • Inefficient competitors generally need not be protected by competition law
  • A dominant firm is unlikely to exclude competitors, if the effective price charged is

not below the costs for an as efficient competitor

  • The actual costs of dominant company is known

How?

Where do we stand on rebates? 22

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SLIDE 23

The AEC test: Contestable volume

Inc Increme ementa ntal l reba bates = T tes = The he incr increme ementa ntal l pu purcha hases ses

  • The purchases above threshold which allows for a given rebate

Retr etroa

  • activ

ctive e reba bates = T tes = The he pa part o t of dema demand nd rivals rivals can can co compe mpete te for

  • r
  • Customers’ willingness to switch (e.g. strong brand loyalty)
  • Rivals’ capacity to expand sales
  • Realistic scale of entry
  • Historical growth patterns of new entrants

Where do we stand on rebates? 23

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The AEC test: The effective price

The effective price is the price that a rival would have to offer in order to compensate the customer for the loss of the conditional rebate by switching the contestable volume to the rival.

Where do we stand on rebates? 24

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SLIDE 25

Retroactive rebates can be very hard to compete against

Retroactive rebates imply that competitors have to offer much higher rebates in order to compete

Where do we stand on rebates? 25

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SLIDE 26

Where do we stand on rebates? 26

List List price price = 100 EUR per unit Retr etroactiv

  • active

e reba bate te = 5% applies to purchases of at least 100 units The contes he contesta table v ble volume

  • lume = 50 units

Cust Custome

  • mer

r dem demand and = 100 units Opti Option 1

  • n 1
  • Buy all 100 units from dominant firm
  • Total price of EUR 9,500. ((100-5)*100=9,500)

Option 2 Option 2

  • 50-50 split between dominant firm and rival
  • 50 unit from the dominant firm cost EUR 5,000

(50*100=5,000)

Effective price = EUR 90 EUR 90 for the contestable volume of 50 units

The AEC test: The effective price

Illustrative example

EUR 500

Price Effective rebate = 10

List price = 100 Rebate price = 95 Effective price = 90

Must buy volume Contestable volume

50 100 Units

EUR 500

100 95 90

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SLIDE 27

The AEC test: Cost benchmarks

Where do we stand on rebates? 27

Aver erage T ge Total

  • tal

Cos Costs ts (A (ATC) C) Long R Long Run A un Aver erage ge Inc Incremental C emental Cost

  • st

(LRAIC (LRAIC) Aver erage A ge Avoida

  • idable

ble cost costs s (AA (AAC) C)

  • The costs that would fall away if it had not

produced the relevant output

  • May costs include both variable costs and some

fixed costs

  • LRAIC plus share of common costs
  • Average variable and fixed costs that a

company incurs when producing a particular product (increment), including development costs

LRAIC and ATC are equal for single product firms

Common costs

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SLIDE 28

The AEC test: Compare the effective price and the cost

Where do we stand on rebates? 28

Price

Test est result esult In Inter terpr preta etation tion Comp

  • mpetitiv

etitive e Imp Impac act

P>ATC AAC<P<ATC P<AAC Rebate does foreclose equally efficient competitors Rebate may foreclose equally efficient competitors. Other factors must be examined Rebate foreclose equally efficient competitors Positive Grey zone Negative

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3

SCREENING FOR POSSIBLE ILLEGAL REBATES

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Designing optimal rebate schemes is complicated task

Where do we stand on rebates? 30

Risks associated with

  • ver

er-co complianc mpliance

  • Reduced competitiveness
  • Less innovative pricing
  • Lower growth and

profitability

Risks associated with under under-co complianc mpliance

  • Scrutiny by competition

authorities

  • Fines
  • Reputational effects
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SLIDE 31

What to do if you offer rebate schemes?

Where do we stand on rebates? 31

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4

QUESTIONS AND DISCUSSION

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www.copenhageneconomics.com

CONTACT

Copenhagen Economics Langebrogade 1 DK-1411 Copenhagen K Henrik Ballebye Okholm hbo@copenhageneconomics.com Torben Thorø Pedersen tpe@copenhageneconomics.com