Loyalty Program Foreclosure

1. Introduction

Loyalty program foreclosure arises when a dominant undertaking designs a loyalty scheme—such as points, rebates, rewards, preferred-customer status, exclusive benefits, cashback, discounts, or tiered rewards—in a manner that makes customers substantially less willing or able to purchase from competing suppliers.

A loyalty programme is not inherently anti-competitive. It may generate legitimate efficiencies, reward genuine volume, reduce transaction costs, encourage repeat purchases, or improve customer service. The competition concern arises where the programme is structured or implemented by a dominant undertaking so that it forecloses rivals from a substantial part of the market.

The classic legal problem is therefore:

When does customer loyalty become exclusionary conduct rather than legitimate competition on the merits?

China is particularly relevant because the Tetra Pak decision of 2016 was an important early Chinese enforcement decision specifically addressing loyalty rebates. Chinese enforcement treated loyalty discounts as potentially falling within the prohibition on other forms of abuse of dominance, rather than treating every discount as unlawful.

2. Meaning of Loyalty Program Foreclosure

A loyalty programme can create foreclosure where customers receive increasingly valuable benefits if they:

• purchase most or all requirements from one supplier;
• meet cumulative purchase thresholds;
• maintain a particular level of spending;
• refrain from switching to competitors;
• use the dominant firm's ecosystem exclusively;
• purchase multiple products together;
• maintain preferred status only by concentrating purchases;
• surrender competing offers or purchases to retain accumulated benefits.

Example

Suppose a dominant airline operates a loyalty programme:

• 1–5 flights: ordinary points;
• 6–10 flights: premium status;
• 11+ flights: free upgrades and lounge access;
• but the customer must obtain 90% of qualifying flights from that airline to retain status.

A competing airline may technically offer a better price or service, but the customer faces a loss of accumulated loyalty benefits by switching.

The programme therefore creates a switching cost and potentially forecloses the competitor.

3. Legal Framework

A. Abuse of Dominance

The principal competition-law theory is abuse of dominance.

The authority normally has to establish:

1. a relevant product and geographic market;
2. dominance or substantial market power;
3. existence of a loyalty mechanism;
4. ability of the mechanism to restrict competition;
5. actual or potential foreclosure effects;
6. absence of sufficient objective justification or efficiency defence.

The mere existence of a loyalty programme does not establish infringement.

4. Forms of Loyalty Programmes Creating Foreclosure Risk

4.1 Retroactive rebates

The customer receives a rebate on all purchases after reaching a threshold.

This can be particularly powerful because losing the threshold may cause the customer to lose rebates on previous purchases.

4.2 Incremental rebates

Only purchases above a specified threshold receive the additional discount.

These may produce less foreclosure pressure than retroactive schemes, although the economic circumstances remain important.

4.3 Exclusivity-linked rewards

Rewards are available only if the customer purchases exclusively, or almost exclusively, from the dominant firm.

4.4 Tiered loyalty programmes

Customers obtain Gold, Platinum or similar status only after satisfying increasingly demanding purchasing conditions.

4.5 Ecosystem loyalty

Customers receive interconnected benefits across several products:

payment service → shopping → delivery → entertainment → financial services.

Switching one component may cause the consumer to lose benefits throughout the ecosystem.

4.6 Points and accumulated rewards

Accumulated points can operate as a form of switching cost, especially where points expire or cannot be transferred between suppliers.

5. Why Loyalty Programmes Can Foreclose Competitors

A. Switching costs

Customers may hesitate to change suppliers because they would lose accumulated benefits.

B. Contestable-share reduction

A competitor may technically compete for the customer's business, but only for the small proportion of purchases that are not required to preserve loyalty benefits.

C. Network effects

In digital markets, more users may make the loyalty programme more valuable, thereby attracting still more users.

D. Economies of scale

Foreclosure may prevent rivals from obtaining sufficient customers to reach efficient scale.

E. Entry barriers

A new entrant may be unable to attract customers because customers are already locked into established reward ecosystems.

F. Data advantages

Digital loyalty programmes generate customer data concerning:

• purchasing frequency;
• preferences;
• price sensitivity;
• location;
• switching behaviour;
• product combinations.

A dominant firm may therefore obtain an informational advantage over competitors.

6. Important Case Laws

1. Tetra Pak International SA — China, SAIC, 2016

This is the most important Chinese reference point for loyalty rebates.

Tetra Pak was found to have abused its dominant position in several relevant markets involving aseptic packaging equipment, packaging materials and technical services. The conduct included various mechanisms encouraging customers to purchase Tetra Pak products and services.

The loyalty-discount component included retrospective and accumulative discounts and customized sales-target discounts. SAIC treated the loyalty-discount conduct under the catch-all abuse provision of the Anti-Monopoly Law.

Significance

The case demonstrated that, under Chinese competition law, a loyalty rebate could potentially constitute abuse even though the AML did not expressly create a separate statutory category called "loyalty rebates."

The case is particularly important for analysing:

• cumulative rebates;
• retrospective discounts;
• customer dependence;
• switching incentives;
• foreclosure;
• aftermarket relationships.

It is widely described as China's first major antitrust decision specifically involving loyalty discounts.

2. Hoffmann-La Roche & Co. AG v Commission — 1979

This is the foundational European loyalty-rebate case.

The Court of Justice examined rebates offered by a dominant undertaking to customers where the rebate structure encouraged customers to obtain their requirements predominantly or exclusively from the dominant supplier.

The Court distinguished ordinary quantity rebates from loyalty-inducing arrangements.

Principle

A dominant undertaking must not use a system designed to tie customers to itself and make it more difficult for competitors to obtain access to the market.

Importance

The case established the classic proposition that loyalty rebates may constitute an abuse because they can prevent customers from switching even where competing suppliers offer attractive alternatives.

3. Michelin I — NV Nederlandsche Banden Industrie Michelin v Commission, 1983

Michelin operated a rebate system for tyre dealers.

The Court considered factors including:

• the dominant firm's market position;
• the structure of the rebate;
• the duration of the arrangements;
• the proportion of purchases covered;
• the ability of dealers to switch.

Principle

A loyalty-inducing rebate system operated by a dominant undertaking can restrict the freedom of customers to choose their suppliers and consequently make market entry or expansion more difficult.

Importance for loyalty programmes

Michelin I is particularly relevant to modern loyalty programmes because it demonstrates that formal exclusivity is unnecessary.

A programme may create foreclosure even where customers remain legally free to purchase from competitors.

4. British Airways plc v Commission — Case C-95/04 P, 2007

British Airways operated incentive schemes for travel agents.

The Commission considered that the arrangements encouraged travel agents to increase their sales of British Airways tickets and thereby reduced their incentive to sell competing airlines' tickets.

The Court upheld the finding that the system could restrict competition.

Principle

A dominant undertaking cannot use a rebate or incentive system merely because customers remain technically free to purchase from competitors.

The relevant question is whether the mechanism has the capability of producing exclusionary effects.

Relevance

This case is particularly useful for:

• airline loyalty programmes;
• travel platforms;
• booking platforms;
• commission schemes;
• platform incentives;
• customer-retention programmes.

5. Tomra Systems ASA v Commission — Case C-549/10 P, 2012

Tomra supplied reverse-vending machines.

Its agreements with customers involved various rebate and exclusivity arrangements.

The European Commission and courts examined whether these arrangements foreclosed competitors from a significant portion of demand.

Principle

A dominant undertaking's rebate system may be abusive where its structure is capable of making it difficult for competitors to obtain sufficient access to customers.

The analysis focuses on the foreclosure capability of the arrangements, rather than merely on whether competitors were formally prohibited from competing.

Relevance to loyalty programmes

Tomra is highly relevant where a modern loyalty programme:

• covers a substantial share of customers;
• uses multiple thresholds;
• operates for long periods;
• produces significant switching costs;
• covers a large portion of customer demand.

6. Intel Corp. v European Commission — Case C-413/14 P and subsequent proceedings

Intel involved conditional rebates provided to major computer manufacturers and a retailer.

The original Commission decision treated the rebates as exclusionary loyalty rebates. The Court of Justice's 2017 judgment established the importance of examining economic evidence where the undertaking argues that its rebates are incapable of producing foreclosure.

The subsequent litigation ultimately led to substantial reconsideration of the Commission's analysis. In 2024, the Court of Justice dismissed the Commission's appeal from the General Court's judgment concerning the loyalty-rebate component.

Important principle

Where an undertaking supplies evidence that its rebate system is not capable of foreclosing equally efficient competitors, the authority must properly consider the relevant economic circumstances.

Relevant factors can include:

• dominant firm's market position;
• share of demand covered by the rebate;
• conditions governing the rebate;
• duration;
• amount;
• overall strategy;
• foreclosure capability.

Significance

Intel is extremely important for modern loyalty programmes because it demonstrates the movement from a formalistic approach toward a more effects-based economic assessment in appropriate rebate cases.

7. Post Danmark A/S v Konkurrencerådet — Case C-23/14, 2015

Post Danmark concerned a dominant postal operator's selective pricing/rebate conduct.

The Court emphasised the need to consider whether conduct by a dominant undertaking is capable of producing exclusionary effects and whether there are objective justifications.

Significance

The case is useful in assessing whether a loyalty or rebate programme actually departs from competition on the merits.

It supports examination of:

• pricing structure;
• duration;
• coverage;
• market conditions;
• competitive effects;
• objective justification.

8. Michelin II — Michelin v Commission, Case T-203/01, 2003

Michelin II concerned a different rebate structure from Michelin I and is important because it demonstrated that the legality of a rebate cannot be determined solely from its label.

The analysis must consider the actual structure and economic operation of the scheme.

Significance

For loyalty programmes, authorities should therefore examine:

• how rewards are calculated;
• whether benefits are retroactive;
• how thresholds operate;
• whether customers can switch without losing substantial benefits;
• how much demand is covered;
• whether rivals can realistically compete for the remaining demand.

7. Comparative Case-Law Principles

8. Loyalty Programme Foreclosure in Digital Markets

The problem becomes more complicated in digital ecosystems.

A platform may offer:

Points + cashback + free delivery + premium membership + payment rewards + preferential access

to encourage consumers to remain inside one ecosystem.

For example, a digital platform could give consumers:

• 10% cashback for purchases through its marketplace;
• additional points when its payment service is used;
• free delivery for platform members;
• additional rewards for using affiliated merchants;
• higher rewards when consumers do not use competing services.

The competition concern increases where the undertaking has significant market power and the programme causes rivals to lose access to a large proportion of users.

9. Key Factors for Determining Foreclosure

Competition authorities should examine the following factors.

1. Market share

The greater the firm's market power, the greater the potential competitive significance.

2. Coverage

What proportion of customers or demand is subject to the loyalty mechanism?

3. Duration

Long-term loyalty arrangements may create greater foreclosure risks.

4. Rebate threshold

A threshold close to the customer's total requirements may substantially discourage switching.

5. Retroactivity

A retrospective rebate can be particularly powerful because losing the threshold may affect earlier purchases.

6. Switching costs

The authority should determine the economic value customers lose by switching.

7. Rival access

Can competitors realistically obtain sufficient customer demand?

8. Contestable share

How much of the customer's demand remains genuinely contestable?

9. Competitor efficiency

Can an equally efficient competitor realistically match the effective price or benefits?

10. Objective justification

The undertaking may argue that the programme produces legitimate efficiencies, such as:

• economies of scale;
• lower distribution costs;
• customer acquisition savings;
• reduced transaction costs;
• improved service quality;
• genuine volume efficiencies.

10. Loyalty Programme vs Legitimate Volume Discount

The distinction is important.

Legitimate volume discount

A supplier may charge:

1,000 units → 5% discount
5,000 units → 10% discount
10,000 units → 15% discount

The discount may reflect genuine cost savings associated with larger orders.

Potentially exclusionary loyalty discount

By contrast:

Buy 90% of your requirements from us → receive a rebate on all purchases.

The second arrangement creates a stronger incentive to avoid competitors.

Thus, the critical question is not:

"Is there a discount?"

but:

"Does the structure of the discount materially restrict customers' ability or incentive to switch and thereby foreclose rivals?"

11. Foreclosure Mechanism

The economic mechanism can be illustrated as:

Dominant position

↓

Loyalty programme introduced

↓

Customer receives accumulated benefits

↓

Switching causes loss of benefits

↓

Customer reduces purchases from rivals

↓

Rivals lose access to demand

↓

Rivals cannot achieve sufficient scale

↓

Entry/expansion becomes more difficult

↓

Potential foreclosure of competition

12. Defences and Objective Justifications

A loyalty programme should not automatically be condemned.

The undertaking may demonstrate that the programme:

A. Reflects genuine efficiencies

The reward corresponds to actual savings generated by increased purchasing volume.

B. Benefits consumers

Customers receive lower prices or better services without significant exclusionary effects.

C. Is open and non-exclusive

Customers can obtain equivalent benefits without materially restricting purchases from rivals.

D. Has limited duration

Short-term promotional programmes may create substantially less foreclosure pressure.

E. Does not cover substantial demand

Competitors may continue to compete effectively for a sufficiently large part of the market.

F. Is objectively justified

There may be legitimate commercial reasons for the structure unrelated to exclusion.

13. China-Specific Analysis

Under China's Anti-Monopoly Law, the central issue is generally abuse of a dominant market position, rather than the mere existence of a loyalty programme.

The Tetra Pak enforcement decision is particularly significant because the authority treated loyalty discounts as a potential form of abusive conduct under the AML's broader prohibition on other recognized forms of abuse.

For a Chinese loyalty programme, an enforcement analysis would therefore examine:

1. relevant market definition;
2. dominant position;
3. market share and market power;
4. customer dependence;
5. rebate/reward structure;
6. cumulative thresholds;
7. exclusivity or quasi-exclusivity;
8. duration;
9. foreclosure effects;
10. effects on competitors and consumers;
11. objective justification.

This approach is especially significant in e-commerce, food delivery, travel booking, digital payments, cloud services, app ecosystems and other platform markets, where loyalty benefits can operate as switching-cost mechanisms.

14. Competition Concerns in Specific Industries

Airlines

Frequent-flyer status can make customers concentrate purchases with one airline.

Credit cards

Points and cashback may discourage consumers from using competing payment instruments.

E-commerce

Platform points may encourage consumers to purchase exclusively within one ecosystem.

Food delivery

Membership benefits such as free delivery can make consumers less likely to use rival platforms.

Hotels

Accumulated nights and elite status may divert demand away from competing hotel chains.

Digital payments

Cashback may encourage consumers and merchants to remain within one payment ecosystem.

Cloud services

Credits and accumulated benefits may make customers reluctant to migrate workloads.

Streaming

Bundled loyalty benefits may increase switching costs where several services are integrated.

15. Key Legal Tests

A competition authority should distinguish three situations:

Situation 1 — Ordinary loyalty programme

Low market power + genuine promotional benefits + easy switching

→ ordinarily limited competition concern.

Situation 2 — Strong loyalty effect

Dominance + substantial customer dependence + significant switching cost

→ closer foreclosure examination required.

Situation 3 — Exclusionary loyalty programme

Dominance + substantial coverage + restrictive thresholds + significant foreclosure capability + weak justification

→ potentially abusive exclusionary conduct.

The third category is where loyalty programmes become a serious competition-law issue.

16. Conclusion

Loyalty Program Foreclosure concerns the use of customer rewards, rebates, points, status benefits or other incentives by a dominant undertaking in a way that may substantially restrict competitors' access to customers.

The case law demonstrates an evolution from the traditional concern with loyalty-inducing rebates in Hoffmann-La Roche, through the rebate and incentive cases such as Michelin, British Airways and Tomra, toward a more economically informed analysis reflected particularly in the later Intel jurisprudence. In China, Tetra Pak is the principal reference point for loyalty discounts under the Anti-Monopoly Law.

The central distinction is therefore:

Rewarding customers for genuine efficiencies is not the same as using loyalty benefits to make effective switching commercially unattractive and thereby exclude rivals.

For examination purposes, the strongest analytical framework is:

Dominance → Loyalty Mechanism → Coverage → Switching Cost → Foreclosure Capability → Actual/Potential Effects → Efficiency/Objective Justification → Overall Competition Assessment.