Here's some description of the LePage case -- EDIT -- some points in the quoted summary underlined.
...3M's rebate programs called the "Executive Growth Fund" and "Partnership Growth Fund" offered higher rebates to customers who purchased targeted amounts of six different 3M product lines (comprising health, home, home improvement, stationery, retail auto, and "leisure time" products). In addition, LePage's alleged that 3M offered certain large customers lump-sum cash payments, promotional allowances, and other cash incentives to encourage them to purchase exclusively from 3M.
3M did not deny that it offered these rebate programs or promotional payments, but argued that its conduct was lawful because it never priced its transparent tape or other products below its costs. Thus, 3M contended that its rebates "were no more exclusive than procompetitive lawful discount programs" and that customers were discouraged from buying from competitors only to the extent that less efficient rivals failed to match the discounts offered by 3M. In addition, 3M acknowledged that it had entered into two contracts which expressly conditioned discounts on exclusivity, but argued that the two customers represented a very small portion of the market. 3M also argued that its cash incentives were not equivalent to exclusive dealing agreements and could not violate Section 2 of the Sherman Act since the jury found that the conduct did not separately violate Section 1 of the Sherman Act.
Third Circuit Opinion
The Third Circuit rejected 3M's defense that it did not violate Section 2 of the Sherman Act simply because all the products subject to the bundled rebate were sold above cost. In the court's view, 3M's bundled rebate program could be unlawful exclusionary conduct because "the principal anticompetitive effect of bundled rebates as offered by 3M is that when offered by a monopolist they may foreclose portions of the market to a potential competitor who does not manufacture an equally diverse group of products and who therefore cannot make a comparable offer."
According to the court, the rebate program
set customer-specific target growth rates in each product line. The size of the rebate was linked to the number of product lines in which targets were met, and the number of targets met by the buyer determined the rebate it would receive on all of its purchases. If a customer failed to meet the target for any one product, its failure would cause it to lose the rebate across the line. This created a substantial incentive for each customer to meet the targets across all product lines to maximize its rebates.
mofo.com
EDIT - the two things I underlined are KEY. FIRST, the targets were independent for each customer, not a fixed volume level that could be justified by volume cost savings. This is identical to the situation with microprocessors, where Intel would tell Gateway that they have to buy 1M Intel CPUs (95% of their volume) to get a 10% rebate, but tell HP they need to buy 8M CPUs to get the rebate (80% of their volume). The second thing underlined is that the ENTIRE LINE received or lost the rebate if one product FAILED to meet the target. Again, the "first dollar" principle.
For reference, the AMD lawsuit goes into detail on how any rebate that grants a rebate only when a certain "target" or "combinination of targets" is met, makes it impossible for a minority competitor to compete. Effectively, if the target is "N units", the marginal cost to an OEM for the N'th unit is NEGATIVE. An example is given where AMD even offered to give a quantity of microprocessors equal to ~5% of the OEM's production to an OEM for FREE, but the OEM turned them down, because the Intel rebate amount was twice as high as the cost of the Intel microprocessors that it purchased instead. AMD refers to this type of rebate as a "first dollar rebate," because if the OEM qualifies by meeting the volume targets, the rebate is applied retractively as a percentage of all microprocessors that had been purchased in the quarter.
From the lawsuit: If the customer achieves the
target, it is entitled to a rebate on all of the quarter’s purchases of all microprocessors – back to
the very first one – generally in the neighborhood of 8-10% of the price paid. Intel provides
the rebate in cash at the quarter’s close.
Clearly, if Intel is giving a 10% rebate on the entire quarter's purchases, then adding an AMD processor to achieve 5% of sales is a NO-GO, because even if they get the microprocessors for free but then lose the rebate, the OEM will have less profit.
One might ask, OK, but don't consumers get the lowest price despite the fact that AMD can't compete?
The answer is NO, and here's why.
If the "first dollar rebates" were ruled illegal, then Intel would be forced to instead offer volume tiered pricing, something like
1-100,00,000 microprocessors: LIST PRICE
100K - 500K microprocessors: 5% discount
500K - 2M microprocessors: 8% discount
>2M microprocessors: 12% discount
Probably 50-70% the computers are sold by OEM's selling >2M per quarter, so, on average the discount for your average computer is probably around 10%, the same as it was with the "first dollar discount" program.
But now, AMD can compete at any OEM, because, on average AMD microprocessors sell for about 25% less than Intel's at the same performance level. Assuming nothing else changes, AMD's market share would increase, and since AMD's CPU's sell for less, consumers would pay less, on average for an equivalent computer.
So "first dollar rebates" are not only bad for AMD, they are bad for the consumer, and should be unequivocably abolished.
Petz |
