Unless otherwise stated, the questions concern unilateral conduct by a dominant firm or firm with significant market power.

Agency Name: Competition Commission, South Africa Date: October 2008 Tying & Bundled Discounting This part of the questionnaire seeks information on ICN members analysis and treatment of tying and bundled discounting. The information provided will serve as the basis for a report that is intended to give an overview of law and practice regarding tying and bundled discounting in the respective jurisdictions. Unless otherwise stated, the questions concern unilateral conduct by a dominant firm or firm with significant market power. For the purposes of this questionnaire, tying is defined as a dominant firm (or firm with substantial market power) selling one product (the tying product) only on the condition that the buyer also purchases a different (or tied) product, or agrees that it will not purchase the tied product from another supplier. It also includes the sale of products or services that could be viewed as separate but are sold only together as a bundle. For the purposes of this questionnaire, bundled discounting is defined as discounts or rebates based on a buyer s purchase of two or more different products or services. Unlike tying, bundled discounting arrangements do not prevent buyers from purchasing individual products separately, although the aggregate price of the individual components is typically higher than the price of the bundle. This part of the questionnaire covers only tying and bundled discounting, and not other practices such as exclusive dealing, single branding, and single-product loyalty discounts and rebates. Your responses should therefore not address these practices unless they have a clear and relevant connection to the analysis and treatment of tying and bundling. You should feel free not to answer questions concerning aspects of your law or policy that are not well developed. Answers should be based on agency practice, legal guidelines, relevant case law, etc., rather than speculation. Experience 1. Please state the statutory provisions or legal basis for your agency to address tying and bundled discounts. Are tying and bundled discounts a civil and/or a criminal violation of your jurisdiction s antitrust laws? Do these provisions apply only to dominant firms or to other firms as well? 2. If your jurisdiction has specific criteria for analyzing tying or bundled discounting, please describe them and state their source. (e.g., legislation, court decisions, or agency policy statements). 3. How many in-depth investigations (i.e., beyond a preliminary review) of tying arrangements and (separately) of bundled discounting arrangements has your agency conducted during the past ten years? Please describe what prompted the investigations (e.g., competitor complaints). 4. State the number of tying arrangements and the number of bundled discounting arrangements your agency found to be unlawful over the past ten years (1999 to date); include cases resolved informally as well as those that 1

For administrative systems (i.e., the agency issues its own decisions on the legality of the conduct, which may be appealable in court), please state the number of agency decisions finding a violation or settlements that were challenged in court and, of those, the number upheld and overturned. For judicial systems (i.e., the agency challenges the legality of the conduct in court and the court issues a decision), please state the number of cases your agency has brought that resulted in a final court decision that the program violates the competition law or a settlement that includes relief. Also state the number of cases that resulted in a final court decision that the conduct did not violate the competition law. Please state whether any of these cases were brought under a criminal antitrust law. Please provide a short English summary of the leading tying and bundleddiscounting cases in your jurisdiction, and, if available, a link to the English translation, an executive summary, or press release. 5. Does your jurisdiction allow private parties to challenge tying or bundled discounting in court? Yes/No. If yes, please provide a short description of representative examples of these cases. If known, indicate the number of cases (or an estimate thereof) brought by private parties. Evaluation of Tying Arrangements 6. In your jurisdiction, is the term tying used in a manner different from the definition in the introductory paragraphs above? If so, how? 7. Please explain the competitive concern(s), if any, generally associated with tying in your jurisdiction, e.g. maintaining dominance/substantial market power in the tying market, distortion of or harm to competition in the tied product market, exploitation of consumers, exclusion of competitors, price discrimination, other. 8. What specific tests, if any, are applied to determine under the competition law whether two products or services are separate rather than a single integrated product? 9. In what market(s) e.g., the tying or the tied market must effects, if any, be shown to demonstrate an illegal tie? a. What specific types of effects must be shown, e.g. market distortion, market foreclosure, harm to consumer welfare? b. What degree of proof is required? Must the effect be actual, likely, or potential? 10. Does intent play a role, and if so what role and how is it demonstrated? Evaluation of Bundled Discounting 11. In your jurisdiction, is the term bundled discounting used in a manner different from the definition in the introductory paragraphs above? If so, how? 12. Please explain the competitive concern(s), if any, generally associated with bundled discounting in your jurisdiction, e.g. maintaining dominance/ substantial market power, distortion of or harm to competition, exploitation of 2

13. Does price-cost comparison play a role in the evaluation of bundled discounting? Yes/No. If yes, please describe the comparison used and the role that it plays. Please also indicate if recoupment plays a role and, if so, what role it plays. 14. What sort of effects, if any, must be shown to demonstrate an illegal bundled discount? For example, must market distortion, market foreclosure, harm to consumer welfare or any other effect be shown? a. What degree of proof is required? Must the effects be actual, likely, or potential? 15. Does intent play a role, and if so what role and how is it demonstrated? Presumptions and Safe Harbors 16. Are there circumstances under which tying or bundled discounting is presumed illegal? Yes/No If yes, please explain, including whether the presumption is rebuttable and, if so, what must be shown to rebut the presumption. 17. Are there any circumstances under which there is a safe harbor? Are there any circumstances under which there is a presumption of legality? Please explain the terms of any presumptions or safe harbors. Justifications and Defenses 18. What justifications or defenses, if any, are permitted (e.g., reduced manufacturing or distribution costs, meeting competition, product reputation, technological linkages) for tying or bundled discounting? a. Please specify the types of justifications and defenses that your agency considers in the evaluation of tying arrangements, the role they play in the competitive analysis, and who bears the burden of proof. b. Please specify the types of justifications and defenses that your agency considers in the evaluation of bundled discounts, the role they play in the competitive analysis, and who bears the burden of proof. Policy 19. What policy considerations does your jurisdiction consider with respect to tying and bundled discounts? You may wish to address the following sorts of issues: Are tying and bundled discounting common? Does your jurisdiction generally consider them to be procompetitive? Does your answer depend on whether the firm is dominant? Does your jurisdiction view tying and bundled discounting by a dominant firm as generally anticompetitive? What competitive concern(s), if any, are generally associated with tying and bundled discounts in your jurisdiction? 20. Please provide any additional comments that you would like to make on your experience with tying and bundled discounting and enforcement in your jurisdiction. This may include, but is not limited to, whether there have been or whether you expect there to be major developments or significant changes in the criteria by which you assess tying and bundled discounting. 3

Agency Name: Competition Commission, South Africa Date: October 2008 Single-Product Loyalty Discounts and Rebates This part of the questionnaire seeks information on ICN members analysis and treatment of loyalty discounts and rebates. The information provided will serve as the basis for a report that is intended to give an overview of law and practice regarding loyalty discounts and rebates in the respective jurisdictions. Unless otherwise stated, the questions concern unilateral conduct by a dominant firm or firm with significant market power. For this questionnaire, loyalty discounts and rebates are defined as discounts or rebates on units purchased of a single product, conditioned upon the level or share of purchases. This part of the questionnaire concerns only treatment of single-product discounts rather than pricing practices involving multiple products (bundling, tying, and related practices). You should feel free not to answer questions concerning aspects of your law or policy that are not well developed. Answers should be based on agency practice, legal guidelines, relevant case law, etc., rather than speculation. Experience 1. Please state the statutory provisions or legal basis that allow your agency to address loyalty discounts and rebates. Are loyalty discounts and rebates a civil and/or a criminal violation of your jurisdiction s antitrust laws? Do these provisions apply only to dominant firms or to other firms as well? In South Africa, the provisions that address loyalty discounts are primarily against dominant firms or firms whose conduct has a substantial impact on the market. Prohibited loyalty discounts are a civil violation of South Africa s competition laws. There are no statutory provisions expressly dealing with bundled or loyalty discounts. However, the Competition Act 89 of 1998, as amended, contains provisions against which bundled discounts and single product loyalty discounts can be assessed including, 8(c), 8(d)(i) and/or 8(d)(iii) of the Act. Bundled discounts can most directly be assessed in terms of section 8(d)(iii) of the Act which states that:- It is prohibited for a dominant firm to... [sell] goods or services on condition that the buyer purchases separate goods or services unrelated to the object of a contract, or [to force] a buyer to accept a condition unrelated to the object of a contract unless the firm concerned can show 4

technological, efficiency, or other pro-competitive gains which outweigh the anti-competitive effect of its act. Allegations of bundled discounts and/or loyalty discounts could conceivably also be assessed in terms of the following rule-of-reason provisions: section 5(1) of the Act, which prohibits restrictive vertical agreements; section 8(c) of the Act, which prohibits exclusionary acts by a dominant firm 1 ; section 8(d)(i), which prohibits a dominant 2 firm from requiring or inducing a customer or supplier not to deal with a competitor; section 8(d)(iv), which prohibits a dominant firm from selling goods or services below their marginal or average variable cost (also referred to as predatory pricing); or section 9 of the Act, which prohibits unjustified price discrimination between purchasers. 3 2. How many in-depth investigations (i.e., beyond a preliminary review) of loyalty discount and rebate programs has your agency conducted during the past ten years? Please describe what prompted the investigations (e.g., competitor complaints). The Competition Commission of South Africa and Competition Tribunal of South Africa have had one in depth investigation which was then referred to the Tribunal for adjudication. The Commission brought this complaint referral against South African Airways (Pty) Limited ( SAA ) following a complaint lodged by the Nationwide Airlines Group ( Nationwide ), a domestic rival of SAA. The Commission alleged that the incentives paid by SAA to travel agents constituted an abuse of dominance designed to exclude or impede SAA s competitors in the domestic airline market. 3. State the number of loyalty discounts and rebate programs that your agency found to be unlawful over the past ten years (1999 to date); include cases resolved informally as well as those that led to a formal decision. If your agency has found any loyalty discounts and rebate programs to be unlawful, please describe the anticompetitive effect and the circumstances that led to the finding. South Africa has found the conduct of SAA to be unlawful, as described above. The case concerned the legality of two incentive schemes, which SAA had with 1 Section 8(c) of the Act is generally referred to as the catch all provision for all abuses by a dominant firm, whereas, section 8(d) prohibits defined exclusionary acts such as inducement, refusal to supply scarce goods, product bundling, predatory pricing and buying-up a scarce supply of intermediate goods. 2 A dominant firm is one that has at least 45% of a market, between 35% and 45%, unless it can show that it does not have market power or less than 35% if it has market power. 3 Section 9(1) of the Act prohibits a dominant seller from discriminating in terms of the price charged, discount, allowance, rebate or credit given, payment for or the provision of services if such discrimination relates to a sale in equivalent transactions between different purchasers. Section 9(2) provides a range of justifications available to a firm for the aforementioned differential treatment, namely: that the differentiation only allowed for reasonable differences in cost, that the differentiation was an act in good faith to meet a benefit offered by a competitor or that the differentiation was in response to changing conditions affecting the market. 5

travel agents: the first incentivised travel agent companies to sell SAA tickets, and the second incentivised travel agent employees directly. The Commission brought this complaint referral following a complaint lodged by the Nationwide Airlines Group ( Nationwide ), a domestic rival of SAA. The Commission alleged that the incentives constituted an abuse of dominance designed to exclude or impede SAA s competitors in the domestic airline market. It found SAA s practices of paying travel agents override incentives and so-called trust payments to be anticompetitive. The Tribunal found that SAA had contravened section 8(d)(i) (the inducement provision) of the Act and ordered it to pay an administrative penalty of R45 million. Regarding the anti-competitive effect: the Tribunal held, in the SAA matter, that travel agents had the ability and the incentive to move customers away from rivals to SAA. The Tribunal accepted as evidence the Commission s economic expert s evidence, which showed that, due to SAA s overwhelming market share, the additional commission generated from alternative airlines was lower. It was shown that, in order for a travel agent to shift 5% market share away from SAA, a Commission of 14.4% would be necessary, which raised rivals costs so significantly that it became unviable. This was because the incentive scheme rewarded travel agents, not just on lower prices for additional tickets beyond a certain target, but lower prices for all of the tickets, back to the first ticket sold. The Tribunal also took into account the nature of the incentive scheme, per the views of the Commission s economist, namely: the discount was passed on to retailers, not consumers, and was therefore less likely to have pro-competitive effects; there was a great degree of non-linearity in the scheme, or the marginal benefits of selling additional tickets (per the example above) were large; the duration of the contracts was approximately one year, which was of sufficient duration for an anti-competitive effect to arise; the scheme involved a lack of transparency. This uncertainty meant that travel agents would be especially conservative in trying to reach their targets. The Tribunal also held that, in a market such as that for airline tickets, travel agents had the ability to move consumers from other airlines to SAA, and did not incur substantial reputational risk in doing this, because information on ticket prices was asymmetrical as a result of their volatility and complexity. Furthermore, the Tribunal examined the following in order to assess the extent of anti-competitive effects: The extent of the market foreclosed to rivals in this case 75% of sales of domestic airline tickets were sold through travel agents, the target of the loyalty rebate scheme; Effects on competitors: the Tribunal found that rivals such as Nationwide experienced lower growth, and in some instances negative growth, over the period during which the incentive scheme was implemented. The Tribunal found against the Respondent, despite the fact that SAA s competitors, Nationwide and Comair, both had similar incentive schemes, and despite the fact that SAA had had a loyalty incentive scheme since Nationwide started its operations, and Nationwide had grown substantially in spite of the 6

scheme. The Tribunal held nonetheless that the nature of SAA s scheme changed in 1999, and essentially became aggressive. Direct evidence of harm to consumers was not required, nor was it shown, in this case. In respect of evidence, the Tribunal accepted the evidence of the Commission s economic expert in respect of demonstrating the anti-competitive effects of the scheme, evidence of SAA s competitors experiencing decline when the scheme became more aggressive, and evidence of SAA s competitors, including board minutes, prepared prior to the commencement of litigation. For administrative systems (i.e., the agency issues its own decisions on the legality of the conduct, which may be appealable in court), state the number of agency decisions finding a violation or settlements that were challenged in court and, of those, the number upheld and overturned. For judicial systems (i.e., the agency challenges the legality of the conduct in court and the court issues a decision), state the number of cases your agency has brought that resulted in a final court decision that the conduct violates the competition law or a settlement that includes relief. Also state the number of cases that resulted in a final court decision that the conduct did not violate the competition law. In South Africa, the Commission has brought one case, the abovementioned case, of loyalty incentives to the Tribunal. Please state whether any of these cases were brought under a criminal antitrust law. No. In South Africa this amounts to a civil violation. Please provide a short English summary of the leading loyalty discount and rebate cases in your jurisdiction, and, if available, a link to the English translation, an executive summary, or press release. Link to the judgment: http://www.comptrib.co.za/list_judgement.asp?jid=110 4. Does your jurisdiction allow private parties to challenge loyalty discounts and rebates in court? Yes/No. If yes, please provide a short description of representative examples of these cases. If known, indicate the number of cases brought (or an estimate thereof) by private parties. In South Africa complainants must first lodge a complaint with the Competition Commission prior to referring a case to the Competition Tribunal themselves. Complainants can refer a case directly to the Competition Tribunal as an interim relief application (prior to the Competition Commission completing its investigation) or as a contested referral (after the Competition Commission has completed its investigation but found that the conduct does not raise competition concerns). In the SAA matter described above, the complainant, Nationwide 7

Airlines lodged an interim relief application with the Competition Tribunal prior to the Commission s referral of the case but it failed in its application. Evaluative Criteria 5. In your jurisdiction, is the term single-product loyalty discounts and rebates used in a manner different from the definition in the first paragraph above? If so, how? No. 6. What are your jurisdiction s criteria for evaluating the legality of loyalty discounts and rebates? a. What anticompetitive effects or other criteria make loyalty discounts and rebates abusive? Must the practice exclude or threaten to exclude rivals from the market? If only threatened exclusion is required, how is it determined? If neither actual nor threatened exclusion is required, what other factors are considered? b. Does intent play a role, and if so what role and how is it demonstrated? c. Does price-cost comparison play a role? If so, please describe the comparison(s) used and the role that it plays. In your answer, you may wish to address the following sorts of issues: What cost measures are used (e.g., average variable cost, average avoidable cost, average total cost)? Are price and cost compared with respect to all of a firm s sales to a particular customer or only with respect to incremental sales? How significant a role does the cost test play (e.g., is pricing below the relevant cost measure required or a pre-requisite to prove illegality? Does pricing above cost prove legality)? Please also indicate if recoupment plays a role and, if so, what role it plays. The Tribunal said in SAA that a complainant must prove that an anti-competitive effect has occurred. An anti-competitive effect could be proven in one of two ways, namely: evidence of actual harm to consumer welfare; or if the exclusionary act is substantial or significant in terms of its effect in foreclosing the market to rivals. In the SAA case, the Commission found that SAA s incentive scheme for travel agents meant that consumers were flying on more expensive tickets. The Commission also stated that SAA would have been able to reinforce its dominant position, restrict new entry into the market, and inhibit competitors from expanding in the market. The Tribunal confirmed this finding and held that the exclusionary act [was] substantial or significant in terms of its effect in foreclosing the market to rivals. The Tribunal does not generally require intent on the part of the firm perpetrating the abuse in abuse of dominance cases. However, it does require that the dominant firm in question be enhancing its market power. This is to some extent linked to intent, in the sense that the dominant firm in question must have an exclusionary strategy in mind with respect to its rivals; excluding firms from markets as a consequence of its conduct, which does not enhance its market power, is not considered anti-competitive. Nonetheless, actual evidence, in the form of strategy 8

documents or otherwise, that the perpetrator intended to exclude its rival, is not necessary. Presumptions and Safe Harbors 7. Are there circumstances under which loyalty discounts or rebates are presumed illegal? Yes/No If yes, please explain, including whether the presumption is rebuttable and, if so, what must be shown to rebut the presumption. No. 8. Has your jurisdiction developed any safe harbors governing loyalty discounts or rebates? Yes/No If yes, please explain the terms of the safe harbor. No. Justifications and Defenses 9. What types of justifications and defenses, if any, are available to the dominant firm (e.g., efficiencies, meeting competition)? Please specify the role they play in the competitive analysis and who bears the burden of proof. In respect of loyalty rebates, in SAA, the Tribunal examined the business reasons for SAA s conduct in some detail but found them wanting. The efficiency defences employed by SAA were that the incentive scheme was trade creating rather than trade diverting, in that it incentivised travel agent staff to improve their knowledge of SAA s products. A further efficiency cited was that travel agents interests were more aligned with those of SAA, and therefore travel agents would report poor service levels to the airline. The Tribunal held that there was an important tension between SAA s efficiency defence in growing the market by attracting consumers into airline travel, and its claim that travel agents did not have the ability to influence consumers; if they were able to influence consumers to buy airline tickets, travel agents did have an impact on consumer choice. The Tribunal found that there was no evidence linking travel agent training with the incentive scheme. Furthermore, the Tribunal accepted the approach taken in certain EU cases which explained that rebate schemes that were volume driven were more likely to be efficient than schemes that were loyalty driven. Specifically, the Tribunal quoted the EC in the BA/Virgin case: A travel agent that sells an inefficiently small number of tickets can earn the maximum commission provided its small sales represent a 25% increase over its sales in the previous year. Equally, a high volume travel agent will not get extra commission in return for the economies of scale it realises for BA unless its sales increase over the previous year... Travel agents are encouraged to remain loyal to BA rather than to sell their services to competitors of BA by being given incentives to maintain or increase their sales of BA tickets which do not depend on the absolute size of those sales. 9

The Tribunal went on to quote the SAS case where the Swedish authority pointed out that one of the objectionable features of the scheme it was considering was that the bonus scales were subjective: The bonus scale is thus not constructed on objective grounds but is wholly and completely adapted to the individual customer s previous purchases. This relates not only to the assessment of the efficiencies of the conduct in question but the anti-competitive effects thereof too; to the extent that single product rebate schemes are targeted to specific customers rather than constructed objectively, they are more likely to be loyalty enhancing and anticompetitive, than they are likely to drive greater volumes of sales, and be procompetitive. Policy 10. What policy considerations does your jurisdiction consider with respect to loyalty discounts and rebates? You may wish to address the following sorts of issues: Are loyalty discounts and rebates common? Does your jurisdiction generally consider them to be procompetitive? Does your answer depend on whether the firm offering the discounts is dominant? Does your jurisdiction view loyalty discounts and rebates by a dominant firm as generally anticompetitive? What competitive concern(s), if any, are generally associated with loyalty discounts and rebates in your jurisdiction? 11. Please provide any additional comments on your experience with loyalty discounts and rebates. You may wish to address whether there are significant policy and/or practical considerations that may lead to greater or lesser agency enforcement against loyalty discounts and rebates pursuant to your unilateral conduct rules, e.g., concern with the risks of false positives/false negatives and/or the presence or lack of evidence of consumer harm. 10