How does the Commerce Commission view rebate schemes?

Wednesday 18 February 2015

Authors: Andy Glenie and Lara Bird

​​This article first appeared in Law News Issue 2 (15 February 2015), published by Auckland District Law Society Inc.

The New Zealand Commerce Commission (Commission) released a report late last year giving a rare insight into how it assesses rebate schemes under the Commerce Act 1986 (Act). Such schemes are common in New Zealand’s concentrated markets, but can give rise to serious issues under sections 27 and 36 of the Act.

Context

Winstone is the only New Zealand manufacturer of plasterboard. Despite the presence of large importers including Elephant and Knauf, Winstone is the largest supplier in New Zealand, holding a market share of over 90%.

In late 2013, the Commission received a complaint alleging that Winstone was acting anti-competitively, using a sophisticated system of discounts to maintain its position in the market for the manufacture and supply of plasterboard. The Commission carried out an in-depth investigation into the complaint.

The Commission’s investigation focused on Winstone’s alleged exclusive agreements with merchants, the rebates it pays to those merchants, and its alleged practice of undercutting other plasterboard suppliers on jobs.

Foreclosure

The Commission considered first whether Winstone’s rebate scheme substantially lessened competition in breach of section 27 by preventing other suppliers from selling plasterboard to merchants. Although the details of the rebate scheme were kept confidential, it apparently involved offering merchants fixed payments that were conditional on enough merchants purchasing a stated portion of their requirements in a given period from Winstone. Without fully explaining its reasoning, the Commission expressed the view that a scheme of that nature would be anti-competitive if there was evidence of merchants retaining those payments rather than competing them away in the downstream market. Here, there was no clear evidence either that merchants were retaining the rebates or that they were passing them on to consumers in the form of reduced prices.

Further, there was no clear evidence that the rebate scheme was discouraging merchants from “dual-stocking” i.e. stocking plasterboard from both Winstone and a rival supplier. Rather, it was thought that merchants did not dual-stock because they were unwilling to take on the inventory risk in the rival product and because the rival product failed to offer a “sufficiently compelling price point”. Importantly, that pricing issue arose independently of the rebate scheme because there was no suggestion that a merchant would lose all of its rebate entitlements if it chose to stock a rival product. There were also several regulatory and commercial reasons why rival suppliers had failed to establish a foothold in the market.

Predatory pricing

The Commission also asked itself whether Winstone had engaged in predatory pricing in breach of section 27 or section 36, by pricing below cost. It quickly dispensed with the latter possibility, reasoning that a firm without substantial market power would operate a similar rebate scheme. Winstone’s conduct therefore did not fall foul of the counterfactual test which reflects the current law under section 36.

More analysis was required under section 27. Here, the Commission focussed on the contestable portion of Winstone’s market share i.e. the amount of plasterboard which a merchant could purchase from a rival supplier in the absence of a rebate effect. The rebates were then attributed to those contestable sales, reducing the effective price paid for those units. That means that the larger the contestable share, the less likely it was that the rebates would lead to below-cost pricing. The Commission then modelled several scenarios, using a range of estimates for the contestable share, as well as an upper bound estimate for the amount of rebate payments that would be lost if a merchant shifted to a rival supplier and Winstone’s avoidable costs. In all but one of those scenarios, the modelling indicated that Winstone’s effective price exceeded its avoidable costs. The Commission therefore concluded that the rebate scheme was unlikely to amount to predatory pricing, and so was unlikely to foreclose entry or expansion into the market.

Conclusion

Although the Commission’s report offers helpful insight into its methods, the analysis and conclusions were heavily fact dependent. Large companies implementing rebate schemes should take care to ensure that they do not run the risk of attracting the Commission’s attention, lest they find themselves embroiled in a long and costly investigation process.​


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.