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CMA sets out guidance on competition concerns regarding discounts and rebates

On 26 June 2015, the CMA closed its investigation into a suspected breach of competition law in the context of discounts and rebates. The CMA did not reach a view as to whether the party to the investigation, a dominant company in the pharmaceutical sector, had been using discounts and rebates to the detriment of customers and competitors in breach of competition rules. The CMA decided, on administrative priority grounds, not to continue its investigation as it no longer fitted within the CMA’s casework priorities.

Having closed the investigation, the CMA noted that this should not be taken to imply that it would not prioritise investigations into suspected loyalty-inducing discount schemes in the future.

What are the potential competition concerns regarding discounts or rebates?

The CMA has set out some general guidance on potential competition concerns regarding discounts and rebates. In particular, the CMA describes some of the circumstances in which the provision of rebates or discounts by a dominant company may raise competition concerns.

The CMA stresses that the circumstances set out below are not an exhaustive list in which potential competition concerns may arise in respect of rebate or discount schemes when imposed by dominant companies.

The provision of discounts or rebates can benefit both customers, through lower prices, and the business providing the discount or rebate, by achieving economies of scale and expanding production. Further, rebates or discount schemes offered by a dominant company that pass the cost savings from increased volumes on to the customer, by offering them lower prices on further units once a particular volume has been purchased (incremental rebates) are, in general, unlikely to raise competition concerns.

But, certain rebates or discounts offered by a dominant company may be capable of restricting competition by having a loyalty-inducing or fidelity-building effect. Such rebate or discount schemes - although not conditional on the customer obtaining all or most of its requirements from a dominant company - may raise competition concerns. This is due to their potential to exclude or limit the ability of competing firms to operate in the market. Where competition is therefore restricted, the CMA notes that the incentives for firms to innovate may be dampened and customers may suffer higher prices in the longer term.

For example, the CMA states that retroactive rebates or discounts ('roll-back’) which are offered by a dominant company and which, on condition that a volume threshold is reached, offer a customer lower prices on units below, as well as above, that threshold may be capable of inducing the customer's loyalty. The CMA sets out that these rebate or discount schemes may have a loyalty-inducing effect when:

  • there are units which a customer is required, or has a strong preference, to buy from the dominant company ( ‘non-contestable’ share of the customer’s demand);
  • there are also units which the customer needs and which the customer may be willing and able to purchase either from the dominant company or from a competitor to the dominant company (the ‘contestable sales'); and
  • the grant of the rebate or discount is conditional on the customer purchasing contestable sales from the dominant company.

According to the CMA, these rebate or discount schemes are likely to make it more difficult for a competitor to compete for the contestable sales. Any competitor would have to compensate the customer for the loss of the discount that it would have received on the contestable share, had it purchased those contestable sales from the dominant company.

Such concerns are likely to be increased where the scheme is such that the customer is able to reduce its overall expenditure on the dominant company's products by increasing the volume of contestable sales it purchases from them. Such a scheme may have a particularly strong loyalty-inducing effect on the customer and make it particularly difficult for a competitor to compete for contestable sales. A competitor would necessarily incur losses if competing on price for those sales, as while not being able to generate any revenue from these sales, some costs would be incurred in supplying them.

It is therefore important that businesses with a strong market position are mindful about potential competition concerns when offering discounts or rebates.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com

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