✨ anti-trust and loyalty programs

thought experiment

It’s possible for loyalty discount programs to have an anti competitive market effect by eliminating competitors, increasing prices, and reducing product quality. But generally, loyalty programs are in a remarkably crowded market, and participation is non-rivalrous (aka someone can participate in an unlimited number of loyalty programs, they are not mutually exclusive). 

That said, the real problem with dominant loyalty programs is that they can hurt small businesses that cannot amass such sophisticated profiles of their ‘loyal’ shoppers, and thus they lose out on the opportunity to strategically incentivize shopping. While loyalty programs are non-rivalrous, they still have the *power* to influence people’s shopping decisions - they are literally designed to make you spend more and shop more often.

[Somewhat] recently, Starbucks and Aeroplan announced that they would be partnering for one year to expand their loyalty points program and share user information. As a thought experiment, this can be considered a temporary merger. Plus, if competition authorities considered consumer data as a relevant asset, this agreement could be viewed as a merger that brings together [and even links] the asset of user profiles. Another way we can look at this deal, according to competition law jargon, is as a “joint venture,” which is a temporary merger of sorts. 

Consumer data is a vehicle for market dominance, and loyalty programs are in essence a micro-payment for your personal data. Plus, “points” are a familiar digital currency. 

In the case of the Starbucks and Aeroplan partnership, the firms are solving for the pandemic-induced ‘problem’ that Aeroplan holders can’t redeem travel points, so they are providing a new way to collect them. It’s  worth remembering that the Starbucks’ loyalty program is basically a free loan scheme for the company - think of it as a treasury of sorts.  Initiated in 2008, the program generates ~40% of the company’s revenue and in 2019, the program had 16M active members. 

Loyalty programs (and the data that feed them) are the primary asset that airline companies have - often worth more than the physical infrastructure of planes and routes.  AirAsia recently swapped stock for full ownership of their loyalty programme. About two years ago, Air Canada re-acquired their loyalty program (Aeroplan) and relaunched it

Share regs to riches

Recall that in the US, when the merger of Google and Fitbit was considered, competition authorities advised that a “data wall” be created between the two firms. They anticipated that the physiological data from Fitbit (e.g. heart rate) could be used to evaluate the effectiveness of online advertising (e.g. your heart speeds up when you see a cool ad). Basically, the competition authority anticipated that this merger would create a barrier to entry for the advertising market by giving Google an extraordinary amount of marketing power. Even though Google and Fitbit weren’t competitors, the merger without any data wall would make them “too” powerful. 

So, what are the potential harms - if any - of a temporary merger of a loyalty program?

While Starbucks and Aeroplan similarly aren’t direct competitors, are they “super” powerful if/when they can jointly monetize the insights derived from their merged data? Does any temporary advantage undermine competition in either the coffee or airline industries? It’s a good thought experiment.  Right now, we think it’s just an incentive to use the app. 

The Federal Trade Commission will launch a new inquiry into the data collection practices of Facebook, Amazon, and other major tech companies, as well as platforms like Reddit and Discord (which are often not mentioned in the same breath as tech behemoths like Amazon and Facebook). Why not look at loyalty programs, too?

The FTC will consider how Amazon Moments gathers data on every one of its customers while they use the site. As well as what you buy, the company monitors what you look at, your shipping address (Amazon can take a surprisingly good guess at your income level based on where you live), and whether you leave reviews/feedback. 

What do the “regs: say?

Under the Competitor Collaboration Guidelines issued by the Competition Bureau, a temporary agreement like the one struck by Starbuck and Aeroplan could be illegal if it is “likely to substantially lessen or prevent competition in any relevant market”. But, to bring a successful case (under section 90.1 of the Competition Act if you want to get specific), the Competition Bureau must first establish that the businesses are competitors “respect to the products that are the subject of the agreement”. Since loyalty programs are non-rivalrous, it’s pretty unlikely that Starbucks and Aeroplan would be deemed “competitors” under the law. 

This technicality highlights that competition policy in Canada does not comprehend the value of data held by companies and how the insights derived from detailed customer data can facilitated unparalleled market dominance through surveillance. Rather, our existing legislation assumes that the *only* competition that matters is competition on price -totally  ignoring how digital firms can essentially compete with and through data, or essentially - privacy. 

As the federal government recently reached an agreement on relief for Air Canada,  one has to wonder if we’re basically propping up loyalty programs through that support. 

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Vass Bednar is the Executive Director of McMaster University’s new Master of Public Policy in Digital Society Program.