Do Retroactive Rebates Imply Lower Prices for Consumers?

Despite a host of recent cases on both sides of the Atlantic, the antitrust implications of retroactive rebates or loyalty discounts are among the most controversial topics in competition law. One of the key beliefs found in the literature is that such schemes lead to lower prices for consumers and that competition authorities therefore need to be particularly prudent in balancing these “obvious" pro-competitive effects against potential foreclosure concerns. Based on a simple model it is shown that retroactive rebates do not necessarily imply lower prices for consumers and that, on the contrary, even total welfare may decline as a result of the introduction of a rebate scheme. In addition to leading to higher prices, rebate schemes may hurt consumers by inducing them to buy a higher quantity than they otherwise would. The belief that rebates increase consumer welfare as they imply lower prices is shown to be based on the fundamentally awed reliance on the non-rebated base price as appropriate counterfactual.