Discounts and other business incentives (rebates) are generally deemed a legitimate and desirable form of competition. However, in certain circumstances, a dominant firm (a monopoly) can use discount schemes to foreclose competition.
The line between a legitimate discount scheme and an illegitimate one has been extensively discussed in economic literature and in foreign jurisprudence. In Israel, however, case law on the topic has so far been rather scarce.
A groundbreaking decision handed down last week by the Supreme Court of Israel establishes, for the first time, the legal framework for analyzing conditional pricing practices employed by dominant firms.
The decision takes a rather strict view on the subject and introduces a burden-shifting framework based on the characteristics of the discount.
In our view, an incorrect (expansive) interpretation of the decision could have an undesired chilling effect on discounts in instances where there is no real concern of significant harm to competition.
The case
The Supreme Court rejected an appeal filed against the ruling by the Competition Tribunal that upheld the Competition Authority decision against a pricing scheme implemented by Ashdod Port.
The facts
In 2015, the Competition Commissioner had declared Ashdod Port to be a monopoly with regard to its business of offloading vehicles from the European Union and the United States in three shipping lines. It was further decided by the Commissioner that Ashdod Port had abused its dominant position by offering retroactive target discounts to vehicle importers, calculated on the basis of the expected demand of customers for the coming year.
Such discounts made it difficult for Haifa Port to compete with Ashdod Port. Due to capacity constraints and other reasons, Haifa Port could not have competed on the customer’s entire demand, but only on part of customer needs.
This led to Ashdod Port’s retroactive discount being disproportionately bigger than any reasonable discount that Haifa Port could have offered. The Tribunal upheld the Commissioner’s decision in this respect, stating that since competition could have existed on only one of these lines, the purpose of the bundled retroactive discount was to foreclose competition.
The decision
Rejecting the appeal against the Competition Tribunal ruling, the Supreme Court did not merely concentrate on the specific circumstances of the case, but rather put in place a general framework for analyzing incentives offered by monopolies.
At the heart of the decision lies a distinction between two types of discounts: quantity discounts – these are granted in relation to the quantity purchased by the customer, and are identical for all customers, without distinction; and percentage discounts – encompassing both loyalty and target discounts, these are individualized discounts that are tailored specifically to each customer, or granted to customers purchasing most or all their requirements from the monopoly.
The Court determined that generally a quantity discount is legitimate, while a percentage discount is illegitimate. However, the Court clarified that this distinction is not exhaustive, and sometimes a quantity discount will be invalidated as unlawful, while a percentage discount will reflect a legitimate practice.
The Court held that the question of whether a competitor that is equally efficient as the monopolist can compete with the discount scheme – a key test in literature and foreign case law – is of limited weight, since a discount that could drive out a less efficient competitor may still be unlawful.
This is especially so given the nature of the Israeli market, as a small and isolated economy, whereby less efficient competitors can present an effective restraint to the monopoly.
The Court clarified that, in order to determine that a discount scheme is unlawful, one must prove reasonable probability of significant harm to competition.
According to Justice Grosskopf’s opinion, in the unique conditions of the Israeli market, proof of potential harm to competition usually does not require a complex evidentiary basis or in-depth economic analysis. However, the other two Justices on the panel (Justice Amit and Justice Baron) disputed this position, and warned against shifting to the monopoly the burden to prove lack of probable significant harm to the competition.
Otherwise, as Justice Baron warned, the requirement of proving potential harmful effects becomes hollow. Justice Baron further stated that proving potential adverse effect typically requires an economic opinion. Thus, it seems the majority of Justices anchored a substantive requirement – economic proof of potential significant harm to competition.
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