Fidelity rebate schemes and Kenyan competition law

published on 20 September 2023 | reading time approx. 4 minutes

Fidelity rebates or loyalty discounts are schemes that are meant to offer better prices to buyers that demonstrate loyalty in the purchases they make. They are often introduced as discounts on an existing price. They may be in the form of exclusivity rebates that depend on the buyer purchasing exclusively from a certain firm or in the form of a discount on further purchases once a buyer makes a certain quantity of purchases.

Rebate schemes based on quantity, and in some cases even those based on exclusivity, can potentially generate a number of efficiencies. For example:

They may pass economies of scale onto consumers thereby bringing down the price of the products.
They can give distributors an incentive to increase their effort to sell the firm’s product.
They can also be used to price discriminate, in which case they may increase competition and expand output.

However, rebate schemes can also harm the consumer especially when exercised by dominant firms in the market. A dominant firm’s use of fidelity rebates can harm consumers by reducing the ability of rivals to compete effectively. For example:

Exclusivity rebates may be used to ensure that competition is for the customer itself, rather than for the number of products purchased by the customer leading to inequalities among rivals.
A dominant firm may have the ability to sacrifice profits in the short term by granting loyalty discounts in a bid to exclude rivals without this ability.
Where there are economies of scale, the inequality might come from the dominant firm’s ability to prevent its rivals from making enough sales to realize those economies of scale.
A dominant firm may deny rivals access to key inputs, thereby increasing their production costs.
Dominant firm may be able to collude with other firms along the supply chain to increase the retail price of its product, while the rivals are not able to do this.

It is very difficult on the face of it to assess whether rebate schemes are pro-competition or anti-competition. This has made rebate schemes to be a very controversial topic under competition law.

Under Kenyan competition law, rebate schemes are not outrightly prohibited, but they can be investigated if they result in exclusive agreements which are anti-competitive. Any person who wishes to implement a rebate scheme should ensure that they have proper justification regarding application of the rebate scheme and the effect of such rebate scheme in the market has been analysed prior to its application.

Rebate schemes are considered proper and pro-competition if the reason behind their application is purely to promote sales within a competitive market. On the other hand, rebate schemes can be considered anti-competitive if their application is driven by a desire to distort competition in the market by creating entry barriers and driving out competition for similar products and services.

The determination of whether a rebate scheme has the potential to be anti-competitive or cause exclusion is only possible by conducting an analysis of its effect in the market through the effects-based approach.

The effects-based approach enables a market player to determine the difference between the legitimate conduct and the anti-competitive conduct. This is especially of concern if the market player sits in a dominant market position in the specified market. The effects-based approach considers whether a rebate scheme has any horizontal or vertical effects on the market. Horizontal effects occur when the actions of the firm in question stifles competition in the market in which it operates. For example, where a firm charges higher prices or reduces its output. Vertical effects occur when the actions of the firm in question stifles competition in its upstream or downstream market. However, vertical effects are not very concerning since in most cases the effects are usually pro-competition.

The below considerations are made in determining whether a rebate scheme deployed by a dominant firm is anti-competitive:

the extent of the firm’s dominant position in the relevant market
the share of the market covered by the contested rebate scheme
the conditions and arrangements for granting the rebates in question, their duration and their amount
the possible existence of a strategy intended to exclude at least rivals in a similar position

There has been a shift from application of the predatory/below-cost pricing test. Predatory/below-cost pricing refers to the lowering of the prices of products to eliminate competition. This test has been found not to be efficient since it can only identify cases in which firms use a fidelity rebate scheme to put in place a strategy of predatory pricing against its rivals. However, it fails to identify cases in which consumers are harmed because of a firm excluding rivals without pricing below cost.

The Competition Authority, which is the body that enforces the Competition Act, 2010 is usually more concerned about rebates schemes when there is a dominant player involved in a market. A dominant player in a market is a market player who controls the specific market and whose actions have the potential to distort competition in the said market. An organisation that sits in such a dominant position is always under major scrutiny.

The Competition Act prohibits such an organisation from applying dissimilar conditions to equivalent transactions with other trading parties. Application of rebates schemes to exclusive persons in the market can therefore be deemed to be in violation of the Competition Act. Such rebates if applied can be considered anti-competitive if they have appreciable adverse effect on competition. Similarly, rebates applied by an organisation in the absence of dominant position in the market are considered safe and for the ultimate benefit of the consumers. Demonstration of reduction of competition or elimination of any competitor is a key determinant in assessing whether an organization is engaging in anti-competitive practices.