Can discounts offered by distributors to retailers harm competition?
Discounts offered by distributors to retailers are generally pro-competitive, as the pass-on effect is that consumers benefit from lower prices. In some cases, however, discounts can be used as an anti-competitive tool by a dominant distributor to exclude rivals from the market and thus harm the process of competition. Ultimately, consumers are deprived of the benefits of competition.
One of the benefit of competition is that consumers pay lower prices for products and services they buy. When it comes to supermarkets or more generally the retail sector, there is often aggressive competition through price discounting, to the advantage of consumers. The ability of retailers to offer discounts on products they sell largely depends on their purchase price and discounts that they obtain from distributors.
Distributors on their part compete to increase their sales through the incentives they give to retailers. In this regard, the granting of discounts by distributors is a common commercial practice to increase their sales and is most of the time pro-competitive. However, discounts can also be used as an anticompetitive tool by a dominant enterprise to foreclose rivals from the market and is reviewable under the abuse of monopoly provisions of the Competition Act 2007.
Dominant enterprises may condition discounts in such a way that retailers are incentivised or tied to purchase exclusively from them. Non-dominant competing distributors and potential entrants may be foreclosed from the market, as retailers will have less financial incentive to purchase products from them. Such practice can therefore result ultimately in consumers being left with limited choice and may be deprived of the price and non-price benefits which competition would have generated.
There may be various forms of discounts that when offered by dominant firms can lead to anti-competitive foreclosure, which means excluding competitors from the market. These can be classified as quantity rebates, retroactive rebates and rebates more generally.
Quantity rebates are presumptively legal, except where these are predatory and as part of an exclusionary strategy. For example, where a dominant supplier systematically offers predatory quantity rebates to retailers on its products whenever the latter sources new competing products. This leads rival suppliers to discontinue supply.
Retroactive rebates are discounts offered on all purchases over a year if the sales exceed a target threshold. Such discounts are likely to provide strong incentives for retailers to focus on the sales of the product concerned and exclude competing products from shelves. Thus, retroactive rebates may have the effect of restricting or eliminating access to other distributors in a particular market.
Rebates on the additional volumes above a threshold are generally not anticompetitive. However, a very high discount on additional volumes, so that the supplier is making a loss on those additional volumes, may be considered anti-competitive. Such rebate schemes are not necessarily anti-competitive, but might be if the effect is to foreclose rival enterprises to the detriment of consumers or the economy as a whole.
The key test for the Competition Commission in assessing any discount scheme is whether it is profitable for the supplier, even without any effects on competitors. If a discount scheme depends for its profitability on reducing or eliminating competitors’ market shares, it is more likely to be found to be anticompetitive.
The Competition Commission has dealt with several alleged practices of discounting by dominant operators. Discounts are generally viewed as an indicator of heathy competition and in many reported cases no anticompetitive effects have been found. In one of its investigation into the supply of processed cheese in the market, the Competition Commission concluded that retroactive rebates had the anticompetitive foreclosure effect. In this particular case, the dominant firm had conditioned discounts on minimum sales target and in exchange of premium shelf space. The conduct was found to be anticompetitive.
In a recent case, there was an allegation that a dominant firm had conditioned the offer of discounts on the sales of a must stock branded cereal provided that retailers buy a branded biscuit exclusively from it. Such a practice is referred to as ‘tying’ where the dominant firm leverage its market power from the tying product (the branded cereal in this case) onto the tied product (that of the branded biscuit). The effect of the practice would result in the foreclosure of actual and potential competitors from the market. The findings of the Competition Commission, however, did not support the allegation made.
To conclude, the offering of discounts by distributors in the market should be encouraged to the extent that it promotes competition. However, dominant players should abstain from using discounts to exclude competitors from the market and thus harm competition, to the detriment of consumers.
This article forms part of a series of articles in a collaboration between the Competition Commission of Mauritius and Le Defi Media, in an attempt to create better awareness of competition law in Mauritius.