Settling for Coupons: Discount Contracts as Compensation and Punishment in Antitrust Lawsuits

Many recent class-action antitrust lawsuits have been settled with discount contracts in which the defendants agree to sell to the plaintiffs in the future at a discount off of the retail price charged to other buyers. The sellers can offset such discounts, however, by increasing the retail price. I show that these settlements have very small effects on the average price paid by all consumers; the harm to nondiscount consumers is about equal to the benefits to discount consumers. Since nondiscount buyers are not parties to these cases, however, the courts usually ignore the effect on them. Furthermore, the punishment imposed on sellers is much smaller than the cost to nondiscount buyers. I then examine an alternative form of "coupon settlements" that need not give sellers an incentive to raise price. The analysis is applied to recent settlements in the airline, auto, photocopying, and electronic game industries. Copyright 1996 by the University of Chicago.