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Bundled Discounts – Good For Competition?

Posted  June 10, 2009

The Supreme Court’s decision in Pacific Bell Telephone Co. v. linkLine Communications, Inc., 129 S.Ct. 1109 (2009), suggests that the Court will apply predatory pricing analysis to all antitrust claims with an aspect of low pricing.

So it follows that bundled-discounting claims would likely receive the same treatment from the Court that price squeeze claims did.  A bundled discount is where a firm grants a discount on one product if customers also purchase a different, second product.  For example, the hot dog stand outside your office building gives you a discount on your hot dog if you also buy a soft drink.  And, of course, much bigger firms are using this approach too — it’s everywhere.

Since bundling is so prevalent and bundled discounts do provide consumers with more products at a lower cost (although you might sometimes wonder if you really wanted all those products in the first place!), this type of discount is generally seen as procompetitive.  In the past, the Supreme Court has been explicit about package pricing being procompetitive.  See Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984).

Are bundled discounts always competitive, though?  Some courts and commentators have said that the way monopolies sometimes go about bundling is anticompetitive.

Let’s go back to our hot dog vendor example.  Say there is a hot dog monopolist controlling the lower Manhattan courthouse district.  Busy court personnel have only ten minutes to grab their lunch, so a hot dog it must be.  If our monopolist gives customers a discount on hot dogs when they also buy a beverage, and no one else can provide lunch, then that hot dog vendor may be able to drive other beverage sellers out of business!  The drink-sellers’ margins will get a tight — maybe even fatal — squeeze if they’re forced to match hot dog discounts with beverage discounts, because unlike the hot dog vendor, they can’t spread discounts over several products.

See SmithKline Corp v. Eli Lilly & Co., 575 F.2d 1056 (3rd Cir. 1978), to see how this plays out in bigger business.

Tagged in: Price Fixing,