Loyalty Program Foreclosure  

1. Introduction

Loyalty program foreclosure is a competition-law concern that arises when a dominant undertaking uses rebates, rewards, points, discounts, preferential benefits, or other loyalty incentives to induce customers or distributors to purchase predominantly or exclusively from it, thereby making it difficult for competitors to obtain sufficient access to the market.

A loyalty programme is not inherently anti-competitive. Competition law generally distinguishes between legitimate customer rewards that improve efficiency or benefit consumers and loyalty schemes that, because of their structure and implementation, exclude or weaken equally efficient competitors.

The central concern is therefore not simply:

“Does the undertaking offer discounts?”

but rather:

“Does the loyalty mechanism materially reduce the portion of demand that remains contestable for competing suppliers?”

2. Meaning of Loyalty Program Foreclosure

A loyalty programme may involve:

• points awarded for repeated purchases;
• cashback;
• volume-based rewards;
• membership discounts;
• preferential pricing;
• rebates conditional on purchasing a high percentage of requirements;
• exclusive-member benefits;
• free services linked to continued purchasing;
• tiered rewards;
• airline or hotel loyalty schemes;
• retailer loyalty programmes;
• platform-based seller or buyer rewards;
• bundled loyalty benefits across several products.

Foreclosure occurs when the programme makes competing suppliers unable to attract sufficient customers or distributors, particularly where the undertaking operating the scheme has substantial market power.

Simplified example

Suppose Supplier A controls 70% of a market and offers customers:

• 2% discount for ordinary purchases;
• 5% if 70% of requirements are purchased from A;
• 12% if 90% is purchased from A.

A customer may technically remain free to buy from Supplier B. However, switching part of its purchases to B may cause the customer to lose the entire 12% benefit.

The incremental cost of switching can therefore become substantially higher than the nominal price difference.

This can make the programme exclusionary even without an express contractual prohibition on dealing with competitors.

3. Legal Characterisation

Loyalty programme foreclosure can arise primarily under abuse-of-dominance provisions, although similar conduct can sometimes raise issues under other competition-law rules.

The principal questions are:

1. Is the undertaking dominant?
2. What is the relevant product and geographic market?
3. Is the loyalty programme capable of foreclosing competitors?
4. Does the scheme cover a substantial portion of customer demand?
5. Are the rebates conditional on exclusivity or quasi-exclusivity?
6. Can customers realistically switch?
7. Is the scheme capable of restricting equally efficient competitors?
8. Are there objective efficiencies?
9. Are consumers ultimately harmed through reduced competition, innovation, quality or choice?

4. Main Forms of Loyalty Foreclosure

A. Exclusivity rebates

The customer receives a rebate only if it purchases all or nearly all of its requirements from the dominant undertaking.

These are particularly sensitive because they can directly reduce the demand available to rivals.

B. Loyalty rebates based on thresholds

A customer obtains a significant reward once purchases exceed a particular percentage.

For example:

The important issue is the incremental rebate and the amount of purchases that the customer would have to divert to a competitor to lose the reward.

C. Retroactive rebates

The customer receives a rebate on all purchases once a threshold is reached.

These schemes can have particularly strong foreclosure effects.

If reaching 90% purchases results in a rebate on the entire year's purchases, switching even a small percentage of purchases to a competitor may cause the customer to lose the rebate on the whole volume.

D. Loyalty points and membership systems

Modern loyalty programmes may use:

• points;
• digital wallets;
• free delivery;
• priority access;
• subscriptions;
• cashback;
• personalised offers;
• airline miles;
• hotel points;
• cross-platform rewards.

Where the undertaking possesses substantial market power, these benefits may potentially create switching costs and customer lock-in.

E. Multi-product loyalty programmes

A dominant undertaking may reward customers for purchasing several products from the same ecosystem.

For example:

Product A + Product B + Product C = enhanced loyalty benefit.

The competition concern becomes greater where competitors are strong in only one of those products and cannot replicate the overall reward.

This can create a form of cross-product foreclosure.

5. Relevant Economic Mechanisms

5.1 Contestable share of demand

A crucial concept is the amount of customer demand that competitors can realistically contest.

If a customer must purchase 90% from the dominant undertaking to receive a substantial benefit, only 10% of demand may remain genuinely contestable.

The scheme can therefore operate as a de facto exclusivity mechanism.

5.2 Incremental rebate

The effective economic burden on a rival can be measured by examining the additional discount or reward that the customer risks losing when it purchases from the rival.

A simplified formulation is:

Effective incremental price = lost loyalty benefit ÷ contestable purchases

If the resulting effective price is sufficiently low, or even below an appropriate cost benchmark, an equally efficient competitor may be unable to compete profitably.

5.3 Switching costs

Loyalty programmes can increase:

• monetary switching costs;
• administrative costs;
• loss of accumulated points;
• loss of status;
• loss of preferential treatment;
• inconvenience;
• psychological switching costs.

These effects can reduce customer mobility.

6. At Least 6 Important Case Laws

1. Hoffmann-La Roche & Co. AG v Commission

Court: Court of Justice of the European Communities
Case: 85/76
Year: 1979

This is the foundational loyalty-rebate case.

Hoffmann-La Roche supplied vitamins and entered into arrangements under which customers received advantages connected with purchasing their requirements from Roche.

The Court held that a dominant undertaking has a special responsibility not to allow its conduct to impair genuine undistorted competition.

The Court distinguished ordinary quantity discounts, which reflect cost efficiencies, from loyalty-inducing arrangements designed to tie customers to the dominant supplier.

Principle

Loyalty rebates linked to customers obtaining all or a substantial proportion of their requirements from a dominant undertaking can constitute an abuse because they may deprive customers of the ability to choose alternative suppliers.

Importance

The case established the fundamental proposition that exclusivity-inducing rebates can constitute abusive conduct even without an express contractual prohibition on purchasing from competitors.

2. Michelin I

Case: NV Nederlandsche Banden Industrie Michelin v Commission
Case: 322/81
Year: 1983

Michelin operated a system of discounts and bonuses for tyre dealers.

The Court considered the structure of Michelin's discount system and its ability to influence dealers' purchasing behaviour.

Principle

A loyalty-inducing rebate system operated by a dominant undertaking may be abusive where it tends to tie customers to the dominant supplier and make market entry or expansion more difficult for competitors.

The Court emphasised factors including:

• dominant position;
• market structure;
• characteristics of the rebate system;
• duration;
• customer's ability to switch;
• competitive conditions.

Importance

Michelin I demonstrated that foreclosure can arise even where the arrangement does not expressly require exclusivity.

3. British Airways v Commission

Case: British Airways plc v Commission
Case: C-95/04 P
Year: 2007

British Airways operated incentive schemes for travel agents. Travel agents could receive additional commissions depending on their sales performance.

The Commission considered that the system created incentives for travel agents to favour British Airways over competing airlines.

Principle

A loyalty-inducing commission or rebate scheme may constitute an abuse where it has the capability of restricting competition by making it more difficult for rivals to compete for the contestable portion of demand.

The Court confirmed that the assessment focuses on whether the scheme is capable of producing an exclusionary effect.

Importance

This case is particularly useful for understanding commission-based loyalty programmes, rather than traditional price rebates alone.

4. Tomra Systems ASA v Commission

Case: Tomra Systems ASA and Others v Commission
Case: C-549/10 P
Year: 2012

Tomra produced reverse-vending machines used for collecting beverage containers.

It employed various agreements and rebate arrangements with customers.

The Commission concluded that the arrangements were capable of foreclosing competitors.

Principle

The Court confirmed that exclusivity arrangements and loyalty-inducing rebate mechanisms operated by a dominant undertaking can restrict competition by limiting the portion of the market available to competitors.

The Court also considered:

• market coverage;
• duration;
• contractual arrangements;
• customer requirements;
• degree of exclusivity;
• ability of competitors to access demand.

Importance

Tomra is particularly important for the proposition that even partial exclusivity can have substantial foreclosure effects where the dominant undertaking covers a significant proportion of demand.

5. Intel v Commission

Case: Intel Corporation Inc. v Commission
Case: C-413/14 P
Year: 2017

Intel granted rebates to major computer manufacturers and a retailer, subject to conditions relating to purchasing Intel processors.

The Court of Justice held that where the Commission is presented with evidence that a rebate may have exclusionary effects, it must examine the circumstances of the conduct, including the as-efficient-competitor (AEC) test where appropriate.

Relevant factors can include:

• dominant firm's market position;
• share of the market covered by the rebate;
• conditions governing the rebate;
• duration;
• amount of the rebate;
• possible exclusionary strategy.

Importance

Intel significantly influenced the modern treatment of loyalty rebates.

It moved the analysis away from an approach under which every conditional rebate from a dominant undertaking was automatically unlawful, particularly where the undertaking presents evidence concerning competitive effects.

Key lesson

The legality of a loyalty programme increasingly requires attention to its actual or potential exclusionary mechanism and economic effects, rather than simply its label.

6. Post Danmark II

Case: Post Danmark A/S v Konkurrencerådet
Case: C-23/14
Year: 2015

Post Danmark operated a system of quantity-based rebates in the Danish postal sector.

The Court considered the circumstances under which a rebate system operated by a dominant undertaking may constitute abusive exclusionary conduct.

Principle

The Court emphasised that the assessment should consider factors such as:

• dominant position;
• market coverage;
• rebate thresholds;
• duration;
• conditions of competition;
• potential foreclosure effects.

The case also clarified that an AEC analysis is not necessarily a mandatory legal test in every loyalty-rebate case.

Importance

Post Danmark II is important because it demonstrates that rebate schemes must be evaluated according to their characteristics and competitive context, rather than through a single mechanical test.

7. Qualcomm

Case: Qualcomm Inc. v Commission
Case: T-235/18
General Court: 2022

Qualcomm granted significant payments to Apple under an agreement relating to Apple obtaining baseband chipsets from Qualcomm.

The Commission treated the payments as exclusivity-inducing incentives.

The General Court ultimately annulled the Commission's decision on the basis of deficiencies in the Commission's assessment, including its treatment of the relevant evidence and effects.

Importance

The case illustrates an important modern principle:

An incentive payment made by a dominant undertaking cannot be condemned merely because it is conditional; the authority must properly establish the competitive effects and causal mechanism.

This is particularly relevant to modern loyalty arrangements involving large technology platforms and strategic customers.

8. Michelin II

Case: Michelin v Commission
Case: T-203/01
Year: 2003

Michelin operated a system involving rebates and bonuses for tyre distributors.

The European courts examined whether the system could strengthen customer loyalty and restrict competitors' ability to compete.

Principle

A rebate system can be abusive where it creates an incentive for customers to obtain a substantial portion of their requirements from the dominant undertaking, particularly where the system is capable of producing loyalty beyond what is justified by genuine efficiencies.

Importance

Michelin II is useful for understanding individualised or discretionary loyalty incentives, as opposed to simple transparent quantity discounts.

7. Comparative Case-Law Table

8. Loyalty Programme vs Ordinary Quantity Discount

This distinction is fundamental.

Ordinary quantity discount

A discount may simply reflect:

• economies of scale;
• lower distribution costs;
• lower transaction costs;
• administrative savings;
• genuine volume efficiencies.

Loyalty rebate

A loyalty rebate may instead reward customers for:

• purchasing almost exclusively from the dominant undertaking;
• reaching a high percentage threshold;
• maintaining purchasing commitments;
• avoiding competitors;
• remaining within a particular ecosystem.

Therefore:

A discount based on quantity is not automatically equivalent to a loyalty rebate.

The economic and contractual structure must be examined.

9. Factors Used to Assess Foreclosure

A. Dominance

The stronger the undertaking's market position, the greater the potential significance of loyalty incentives.

Relevant factors include:

• market share;
• barriers to entry;
• network effects;
• customer dependence;
• access to essential inputs;
• economies of scale;
• switching costs.

B. Market coverage

A programme affecting a tiny portion of customers may have limited foreclosure effects.

A programme covering a substantial percentage of demand can materially reduce opportunities available to competitors.

C. Duration

Long-term loyalty arrangements may produce stronger foreclosure effects because competitors cannot obtain customers during the relevant period.

D. Rebate structure

Authorities may examine whether the rebate is:

• incremental;
• retroactive;
• conditional;
• target-based;
• individualised;
• discretionary;
• exclusive;
• linked to total requirements.

E. Threshold level

A threshold of 20% may leave substantial demand contestable.

A threshold of 90–100% can operate much more like exclusivity.

F. Contestable share

Authorities may ask:

How much of the customer's demand can realistically be switched to a competitor without losing the benefit?

This is often more informative than simply examining the nominal rebate percentage.

G. Duration and frequency

Repeated monthly, quarterly or annual targets may reinforce loyalty.

A programme that continuously resets customers' eligibility can make switching more difficult.

10. Digital Loyalty Programmes

Modern competition law increasingly encounters loyalty systems involving digital ecosystems.

Examples include:

• e-commerce memberships;
• platform subscriptions;
• digital wallets;
• app ecosystems;
• online marketplaces;
• cloud services;
• food-delivery platforms;
• ride-hailing applications;
• streaming services;
• airline platforms.

A dominant platform could potentially combine:

membership + cashback + preferential ranking + free delivery + data benefits

to make customers strongly dependent on its ecosystem.

The competition analysis may therefore extend beyond traditional price rebates.

11. Loyalty Foreclosure and Network Effects

Digital markets can make loyalty foreclosure particularly significant.

Suppose a platform has:

• millions of users;
• a large merchant network;
• substantial data advantages;
• integrated payment services;
• a loyalty programme.

The loyalty programme may increase the platform's attractiveness, which attracts more users, which attracts more merchants, which further increases platform attractiveness.

This may produce a feedback loop.

Consequently, the foreclosure concern may involve not merely current price competition but also the ability of rivals to reach sufficient scale.

12. Consumer Benefits and Efficiencies

A loyalty programme may have legitimate objectives.

Potential efficiencies include:

• reducing transaction costs;
• rewarding genuine volume;
• encouraging repeat purchases;
• reducing customer-acquisition costs;
• improving demand forecasting;
• reducing distribution costs;
• facilitating investment;
• improving customer service;
• generating economies of scale.

Therefore, competition law should not treat every loyalty programme as unlawful.

The relevant question is whether the pro-competitive justification is credible and proportionate to the exclusionary mechanism.

13. Possible Anti-Competitive Effects

Where foreclosure is established, possible effects include:

1. Exclusion of competitors

Rivals may be unable to obtain sufficient customers.

2. Raising rivals' costs

Competitors may have to offer unusually large discounts merely to compensate customers for lost loyalty benefits.

3. Entry barriers

Potential entrants may find that too little demand remains available to reach efficient scale.

4. Reduced innovation

If rivals cannot obtain customers, innovative products may fail to achieve market adoption.

5. Reduced consumer choice

Customers may become increasingly dependent upon the dominant undertaking.

6. Long-term price effects

After competitors have been weakened or excluded, competitive pressure may decline.

14. Loyalty Foreclosure vs Exclusive Dealing

A loyalty programme can therefore function as de facto exclusivity even when it does not legally require exclusive purchasing.

15. Defences and Justifications

A dominant undertaking may argue that the loyalty programme:

1. reflects genuine cost savings;
2. rewards actual volume;
3. reduces administrative costs;
4. benefits consumers;
5. increases output;
6. improves distribution;
7. encourages investment;
8. promotes innovation;
9. is open to all customers on transparent terms;
10. does not materially foreclose competitors.

However, the existence of a consumer benefit does not automatically eliminate an abuse concern where the mechanism is capable of substantially restricting competition.

16. Remedies

Competition authorities may potentially impose:

Behavioural remedies

• prohibit exclusivity conditions;
• modify rebate thresholds;
• prohibit retroactive rebates;
• require transparent eligibility criteria;
• prevent discriminatory loyalty conditions.

Structural or broader remedies

In particularly serious circumstances, authorities may consider stronger measures where behavioural remedies are insufficient.

Monetary penalties

Competition authorities may impose fines where the applicable competition statute provides for them.

17. Key Legal Tests and Analytical Approaches

A modern assessment can be organised as follows:

Dominance

↓

Identify loyalty mechanism

↓

Determine market coverage

↓

Examine rebate/benefit structure

↓

Calculate realistically contestable demand

↓

Assess switching costs

↓

Consider duration

↓

Examine ability to foreclose equally efficient competitors

↓

Assess actual or potential effects

↓

Consider efficiencies and objective justification

↓

Determine appropriate remedy

18. Important Distinction: Capability vs Actual Foreclosure

Competition law does not necessarily require proof that every competitor has already exited the market.

A loyalty programme may raise concerns where its structure is capable of restricting competition.

At the same time, modern case law—particularly following Intel and later developments—places considerable importance on properly establishing the relevant exclusionary mechanism and competitive effects where such an effects-based assessment is required.

Thus, the analysis should avoid two extremes:

• assuming every loyalty rebate is automatically illegal; or
• requiring proof that competitors have already been eliminated.

19. Conclusion

Loyalty Program Foreclosure concerns the use of customer rewards, rebates, commissions, points, discounts or other incentives by a powerful undertaking in a manner capable of restricting competitors' access to customers.

The leading cases establish a progression:

• Hoffmann-La Roche established the fundamental concern with exclusivity-inducing loyalty rebates.
• Michelin I and II developed the analysis of loyalty-oriented rebate systems.
• British Airways applied the principles to incentive commissions.
• Tomra emphasised market coverage and foreclosure of contestable demand.
• Intel strengthened the importance of an effects-oriented assessment in appropriate cases.
• Post Danmark II reinforced contextual analysis of rebate schemes.
• Qualcomm demonstrates the importance of establishing the actual competitive mechanism and effects of conditional incentives.

The central competition-law issue can therefore be expressed as:

Whether the loyalty programme merely rewards legitimate efficiencies and consumer patronage, or instead uses the dominant undertaking's market power to make a substantial portion of demand effectively unavailable to competing suppliers.

In contemporary digital markets, the concept is increasingly relevant to platform memberships, cashback systems, ecosystem rewards, subscription programmes, marketplace incentives and cross-product loyalty schemes, where loyalty benefits may generate switching costs and reinforce network effects.