| Abstract : | Discounts by firms to their clients are a form of price competition that can lead to benefiting consumers or can also be a form of innocent price discrimination. Still, some types of conditional rebates may entail competitive harm, when they are used as an exclusionary means or a cheap and easy way for predation. Under conditional rebates, the customer is granted the rebate if its purchases over a defined reference period exceed a certain threshold. Such rebates can have exclusionary effects, without necessarily entailing a sacrifice for the dominant firm. The controversy regarding whether loyalty rebates are motivated by innocent purposes or not has lead to increased research attention on this issue. Several researchers have presented models on supplier's incentives to offer a rebate scheme as well as on the structure of the optimal contracts, either for retroactive rebates or incremental rebates. As far as antitrust law is concerned, the article 102 of Treaty is the one providing antitrust authorities with the necessary guidelines so as to examine possible anti-competitive consequences of discount strategies. However, this treatment of loyalty discounts is maybe the most heavily criticized and debated field of the European Competition policy. That is why a lot of work has focused on commenting on the proposed tests as well as suggesting alternative rules of reason. Case-laws, such as Tomra v. Prokent, are an illustrating example of this treatment. The majority of EU Courts have persistently banned pricing schemes by dominant firms that involve loyalty discounts, unless they can be proved to be cost-based. The Court decisions offer detailed explanations, yet, the authorities' approach in these cases has been characterized as incomplete or even lacking in economic foundation, far from the effects-based spirit of the article. Moreover, loyalty rebates constitute the area where one can detect the largest degree of divergence between U.S and European case-laws. This discrepancy is evident in the case of Virgin v. British Airways. While the European authorities, usually hold fidelity discounts as an abusive way of distorting competition, U.S case law treats them mostly as a pro-competitive business practice. While both the pro-competitive arguments in favor and the anti-competitive arguments against the use of loyalty rebates have some merit, it appears that a case-by-case examination with economic criteria is necessary. More theoretic work on the use of discounts in multi-period settings or in cases of incomplete information might shed more light on this controversial issue, thus assisting antitrust authorities in their attempt to protect competition and consumer welfare.
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