Quantity Discounts and Market Power: The Michelin Case Revisited

Quantity discounts of all kinds — be it pure quantity discounts, bundled discounts, or market-share discounts — have raised considerable antitrust concerns. Unlike its U.S. counterpart, the European Commission (EC) has adopted a fairly tough stance on such business practices, to the point of even outlawing standardized pure quantity discounts. In this chapter, we will briefly review the literature on anticompetitive effects of vertical restraints in general, before discussing in more detail the recent contributions on the economics of quantity discounts and market-sharing discounts. We will then explore how fidelity rebates can be used by a dominant supplier to achieve both horizontal and vertical control in an industry where two retailers first contract with the dominant supplier, and then compete for the supplies of a vertically differentiated entrant. Our findings are then applied to the EC's Michelin II decision of 2001, to help us understand the impact it had on the structure of vertical relations and on consumer welfare in the French truck tire market.