Competition Law and Loyalty Ecosystems and Market Foreclosure

1. Introduction

Loyalty ecosystems are business systems designed to encourage customers, distributors, suppliers, or business partners to remain within a particular commercial network. They can include:

loyalty discounts and rebates;

membership programmes;

exclusive purchasing arrangements;

bundled products and services;

reward points;

subscription ecosystems;

app and platform ecosystems;

preferred-supplier arrangements;

interoperability restrictions;

customer lock-in mechanisms.

Loyalty mechanisms are not automatically unlawful. They can provide genuine benefits such as lower prices, convenience, rewards and improved services.

The competition-law concern arises when a powerful firm uses a loyalty ecosystem to foreclose competitors, meaning that rivals are prevented or substantially impeded from accessing customers, suppliers, distribution channels, or other essential competitive opportunities.

2. Meaning of Loyalty Ecosystems

A loyalty ecosystem is broader than a traditional loyalty programme.

A traditional loyalty programme might simply provide:

“Buy 10 products and receive one free.”

A loyalty ecosystem can connect several markets:

Hardware → Operating System → App Store → Cloud Service → Payment Service → Subscription → Advertising → Data.

The customer may receive benefits for remaining inside the same ecosystem.

This can create substantial switching costs and increase customer retention.

3. Meaning of Market Foreclosure

Market foreclosure occurs when conduct significantly restricts competitors' ability to compete for customers, suppliers, distribution or other important inputs.

Foreclosure may involve:

exclusive dealing;

loyalty rebates;

conditional discounts;

tying;

bundling;

contractual restrictions;

technical restrictions;

self-preferencing;

refusal of access;

interoperability restrictions.

Foreclosure does not necessarily mean that competitors are completely eliminated.

Even partial foreclosure can raise competition concerns if it materially reduces rivals' ability to compete.

4. Loyalty Versus Exclusion

The fundamental distinction is:

Legitimate loyalty

A company rewards customers because it provides better:

price;

quality;

service;

convenience;

technology.

Potentially problematic loyalty

A dominant company structures rewards so that customers are effectively discouraged from purchasing from competitors.

For example:

A dominant supplier gives a 5% rebate for ordinary purchases but a 40% rebate if the customer obtains almost all requirements from that supplier.

The second arrangement may make it commercially difficult for rivals to compete for the remaining demand.

5. Why Loyalty Ecosystems Can Create Competition Concerns

5.1 Customer lock-in

Customers may accumulate:

reward points;

stored data;

subscriptions;

purchase history;

personalized settings.

Leaving the ecosystem may mean losing these benefits.

5.2 Switching costs

Customers may have to:

learn another system;

transfer data;

replace hardware;

change payment methods;

abandon accumulated rewards.

5.3 Network effects

An ecosystem can become more valuable as more customers and suppliers participate.

This can create a cycle:

More users → more suppliers → better ecosystem → more users.

5.4 Reduced market access

Competitors may find it increasingly difficult to obtain customers.

6. Loyalty Rebates

Loyalty rebates are discounts linked to purchasing behaviour.

There are different forms.

Quantity rebates

Discount increases because the customer buys larger quantities.

Loyalty rebates

Discount depends on purchasing a substantial proportion of requirements from one supplier.

Exclusivity rebates

Discount is available only if the customer purchases exclusively or almost exclusively from the dominant supplier.

Competition law treats these categories differently depending on the jurisdiction and circumstances.

7. Exclusive Dealing

Exclusive dealing occurs when a buyer or distributor is required or strongly incentivized to deal primarily or exclusively with one supplier.

Example:

A dominant beverage manufacturer requires retailers to stock its products exclusively in exchange for substantial rebates.

The concern is that competing manufacturers may lose access to retailers.

However, exclusivity can sometimes be legitimate where it:

reduces distribution costs;

protects investments;

ensures product availability;

supports new market entry.

Therefore, the economic effects matter.

8. Loyalty Ecosystems and Vertical Foreclosure

Vertical foreclosure occurs when conduct restricts competitors at another level of the supply chain.

For example:

Manufacturer → Distributor → Retailer → Consumer

If a dominant manufacturer locks up most distributors through exclusivity agreements, competing manufacturers may struggle to reach consumers.

Similarly:

Platform → App developers → Consumers

A dominant platform might potentially use contractual or technical restrictions to disadvantage competing services.

9. Horizontal and Vertical Effects

Loyalty ecosystems can have both:

Vertical effects

Restrict access to suppliers, distributors or customers.

Horizontal effects

Reduce competition between firms selling competing products.

The same conduct can therefore affect several levels of the market.

10. Relevant Market

Before determining whether foreclosure is significant, authorities generally examine the relevant market.

Questions include:

What products compete?

What geographic area is relevant?

Are customers able to switch?

Are there substitutes?

How strong are network effects?

How significant are switching costs?

Market definition is particularly difficult in ecosystem markets because one company may operate across several interconnected markets.

11. Dominance and Market Power

A loyalty arrangement becomes particularly significant when adopted by a firm possessing substantial market power.

Relevant factors can include:

market share;

barriers to entry;

network effects;

customer dependence;

switching costs;

control of infrastructure;

intellectual property;

access to data;

financial strength.

Important: market power or dominance alone is not automatically unlawful. The competition concern generally concerns abusive or exclusionary conduct.

12. Foreclosure Mechanism

A typical foreclosure mechanism can be represented as:

Dominant firm

↓

Loyalty incentive

↓

Customer commits substantial purchases

↓

Competitor loses access to demand

↓

Competitor's scale decreases

↓

Competitor's costs rise

↓

Entry or expansion becomes more difficult

↓

Competitive pressure decreases

This is the central theory behind many loyalty-foreclosure cases.

13. Case Law

1. Hoffmann-La Roche & Co. AG v Commission, Case 85/76 (1979)

This is one of the leading EU authorities concerning loyalty rebates.

The European Court of Justice examined agreements involving a dominant undertaking and purchasing commitments.

The Court emphasized that a dominant undertaking has a special responsibility not to impair genuine competition.

Importance

The case demonstrates that loyalty-inducing arrangements by a dominant firm can create foreclosure concerns where they make it difficult for competitors to obtain customers.

14. Intel Corp. v Commission, Case C-413/14 P (2017)

Intel is one of the most important modern cases concerning loyalty rebates.

The case involved rebates offered by Intel to major computer manufacturers and a retailer.

The Court of Justice clarified that where a dominant undertaking argues that its conduct is not capable of restricting competition, the competition authority may need to examine relevant economic factors, particularly where the undertaking submits evidence concerning the conduct's ability to produce exclusionary effects.

Relevant factors can include:

market position;

share of the market covered by the practice;

conditions of the rebates;

duration;

amount;

possible foreclosure strategy.

Importance

Intel significantly developed the effects-based analysis of loyalty rebates.

15. British Airways plc v Commission, Case C-95/04 P (2007)

British Airways concerned commission arrangements and incentives offered to travel agents.

The European courts considered whether the incentive system could discourage agents from dealing with competitors.

Importance

The case illustrates how financial incentives can become a competition concern where they encourage customers or intermediaries to concentrate their purchases with a dominant undertaking.

It is especially relevant to:

rebates;

commissions;

customer incentives;

distribution networks;

foreclosure.

16. Tomra Systems ASA v Commission, Case C-549/10 P (2012)

Tomra concerned loyalty arrangements and rebates used by a dominant supplier of reverse-vending machines.

The EU courts examined the foreclosure effects of the arrangements.

Importance

The case illustrates that foreclosure can occur even where competitors technically remain able to compete for part of the market.

The practical question is whether the dominant firm's arrangements make it significantly more difficult for competitors to compete effectively.

17. Michelin v Commission, Case 322/81 (1983)

Michelin involved a system of rebates offered by a dominant tyre manufacturer to dealers.

The Court examined whether the rebate system could tie dealers to the dominant supplier and restrict competition.

Importance

Michelin is an important authority concerning:

loyalty rebates;

dealer incentives;

dominant undertakings;

customer dependence;

exclusionary effects.

It also helped establish the principle that the assessment of rebate systems must consider their practical competitive effects.

18. United Brands Company v Commission, Case 27/76 (1978)

United Brands concerned abuse of dominance in the banana market.

The case is a foundational EU competition-law authority concerning:

market definition;

dominance;

abusive conduct;

market power.

Relevance to loyalty ecosystems

The case provides the broader legal framework within which exclusionary practices by dominant companies are assessed.

It demonstrates that competition law focuses not merely on market share but also on the manner in which market power is exercised.

19. Google and Alphabet v Commission (Google Shopping), Case T-612/17 (2021)

The Google Shopping litigation concerned Google's treatment of its comparison-shopping service within its general search results.

The case illustrates how a dominant digital platform can potentially affect competitors' ability to reach consumers.

Relevance to loyalty ecosystems

Digital ecosystems can control important consumer-access points.

If competitors depend upon a dominant platform for visibility or customer acquisition, platform practices can potentially produce foreclosure effects.

This is an important development beyond traditional rebate cases.

20. United States v Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001)

Microsoft involved Microsoft's conduct concerning its operating-system dominance and browser competition.

The U.S. Court of Appeals considered various practices that affected the ability of competing technologies to gain distribution.

Relevance

Microsoft demonstrates how an ecosystem can become an important source of competitive power.

Operating system:

OS → Browser → Developers → Users

Control over one part of the ecosystem can influence competition in connected markets.

21. Lorain Journal Co. v United States, 342 U.S. 143 (1951)

The case concerned a dominant newspaper's efforts to prevent advertisers from using a competing radio station.

Importance

It is a classic example of exclusionary conduct designed to prevent a rival from obtaining commercial support.

The case demonstrates that foreclosure can occur by controlling access to customers rather than by simply raising prices.

22. Aspen Skiing Co. v Aspen Highlands Skiing Corp., 472 U.S. 585 (1985)

Aspen Skiing concerned cooperation between competing ski operators and the refusal by a dominant operator to continue a prior cooperative arrangement.

Importance

The case is relevant to ecosystem competition because it illustrates the importance of access and cooperation where a dominant firm's conduct can affect a rival's ability to compete.

However, refusal-to-deal liability remains exceptional and highly fact-specific.

23. Loyalty Ecosystems in Digital Markets

Digital ecosystems can produce stronger loyalty effects than traditional loyalty schemes.

Examples include:

Smartphone ecosystem

Hardware → Operating system → App store → Payments → Cloud → Subscription

E-commerce ecosystem

Marketplace → Payment → Logistics → Advertising → Membership

Cloud ecosystem

Cloud infrastructure → Software → Data → AI → Enterprise applications

Social-media ecosystem

Platform → Advertising → Content creators → Users → Data

The greater the number of interconnected services, the greater the potential switching costs.

24. Tying and Bundling

Loyalty ecosystems can also involve tying.

Tying

Customer must obtain Product A to access Product B.

Bundling

Several products are offered together.

Bundling can generate efficiencies.

For example:

Integration may reduce costs and improve user experience.

But it may raise competition concerns where a dominant firm uses one market to protect or expand its position in another.

25. Self-Preferencing

A platform may give preferential treatment to its own products or services.

For example:

A dominant marketplace ranks its own products above competing sellers.

Self-preferencing is not automatically unlawful.

The analysis depends on:

dominance;

market structure;

access conditions;

effects on competitors;

consumer effects;

justification;

applicable law.

Google Shopping is an important reference point in this context.

26. Switching Costs and Lock-In

Loyalty ecosystems can create several types of switching costs.

Financial

Customer loses accumulated rewards.

Technical

Data cannot easily be transferred.

Contractual

Customer faces termination costs.

Psychological

Customer is accustomed to the ecosystem.

Network-related

Friends, suppliers or business partners use the same system.

Learning costs

Users must learn a new platform.

When switching costs become substantial, competitors may find customer acquisition much harder.

27. Loyalty Points and Digital Currency

Reward systems can also create ecosystem dependence.

For example:

Customer earns points through purchases → points can only be used within the ecosystem → customer continues purchasing to preserve accumulated value.

This can be commercially beneficial.

However, if a dominant undertaking uses such a system to prevent customers from switching, competition authorities may examine its foreclosure effects.

28. Duration of Loyalty Arrangements

Duration is important.

A short-term promotional programme may have limited foreclosure effects.

A multi-year exclusive arrangement may have considerably stronger effects.

Authorities may therefore examine:

contract duration;

renewal mechanisms;

termination rights;

percentage of demand covered;

cumulative effect of contracts.

29. Market Coverage

One important question is:

How much of the market is actually tied up?

If a dominant firm has exclusive arrangements covering only a very small portion of demand, foreclosure may be limited.

If contracts cover a very large proportion of customers or distributors, rivals may have insufficient opportunities to compete.

Market coverage must therefore be assessed together with other circumstances.

30. Entry Barriers

Foreclosure becomes more significant when new competitors face substantial barriers.

Examples include:

high capital requirements;

network effects;

patents;

regulation;

switching costs;

limited distribution channels;

access to data;

economies of scale.

Where entry is easy, foreclosure may be less durable.

Where entry is extremely difficult, exclusion can have longer-lasting consequences.

31. Efficiency Justifications

Businesses may legitimately argue that loyalty arrangements create efficiencies.

Possible benefits include:

lower distribution costs;

predictable demand;

investment in equipment;

improved logistics;

better customer service;

reduced transaction costs;

financing of infrastructure;

protection against free-riding.

Competition law should consider genuine efficiencies rather than treating every loyalty arrangement as anticompetitive.

32. Competition Between Ecosystems

Modern competition may occur between entire ecosystems.

For example:

Ecosystem A

Hardware + software + cloud + payment + subscription

versus

Ecosystem B

Hardware + software + cloud + payment + subscription

The competitive question may therefore extend beyond individual products.

A dominant ecosystem could potentially use control in one layer to protect its position in other layers.

33. Data-Based Loyalty

Digital loyalty ecosystems can collect:

purchasing history;

browsing information;

preferences;

location information;

transaction information;

engagement data.

Data can improve services and personalization.

But competition concerns may arise if exclusive access to strategically important data creates significant and durable barriers to competitors.

Again, having more data is not by itself an antitrust violation.

34. Algorithmic Loyalty Systems

Modern loyalty programmes can be automated.

Algorithms may determine:

customer discounts;

personalized offers;

ranking;

recommendations;

reward levels.

This creates new questions:

Are competitors systematically disadvantaged?

Are customers being individually locked into the ecosystem?

Are prices personalized in a discriminatory manner?

Is the algorithm implementing an exclusionary commercial strategy?

The underlying competition-law principles remain relevant even when technology automates the conduct.

35. Long-Term Foreclosure

Long-term foreclosure is particularly important because temporary exclusion can become permanent.

A simplified cycle is:

Exclusivity

↓

Rivals lose customers

↓

Rivals lose scale

↓

R&D and investment decline

↓

Entry becomes harder

↓

Dominant ecosystem becomes stronger

↓

More customers become dependent

↓

Further foreclosure

Competition authorities may therefore examine cumulative effects rather than individual contracts in isolation.

36. Remedies

Where unlawful foreclosure is established, possible remedies may include:

Contractual remedies

removing exclusivity;

reducing contract duration;

allowing termination.

Financial remedies

fines;

recovery of unlawful benefits where legally available.

Access remedies

interoperability;

reasonable access;

non-discriminatory access.

Structural remedies

In exceptional circumstances:

divestiture;

separation of businesses.

Digital remedies

data portability;

interoperability;

transparent ranking;

non-discriminatory platform access.

The appropriate remedy depends on the legal violation and jurisdiction.

37. UAE Perspective

In the UAE, loyalty ecosystems and foreclosure can be examined within the broader federal competition framework associated with Federal Law No. 4 of 2012 on the Regulation of Competition, together with applicable implementing provisions and sector-specific regulation.

Potentially relevant sectors include:

telecommunications;

e-commerce;

payment systems;

aviation;

logistics;

digital platforms;

retail;

financial technology.

In a UAE context, analysis should distinguish ordinary commercial loyalty programmes from arrangements that may involve dominance, restrictive agreements, abuse of market power or substantial foreclosure.

38. Practical Competition-Law Test

When analysing a loyalty ecosystem, consider the following sequence:

Step 1 — Identify the market

What product and geographic market is affected?

Step 2 — Identify market power

Does the undertaking possess substantial market power or dominance?

Step 3 — Identify the loyalty mechanism

Is it:

a rebate?

exclusivity?

bundling?

membership?

tying?

technical restriction?

Step 4 — Measure coverage

What proportion of demand is affected?

Step 5 — Examine duration

How long do the restrictions operate?

Step 6 — Examine rivals

Can competitors realistically obtain customers elsewhere?

Step 7 — Examine switching costs

How difficult is it for customers to leave?

Step 8 — Examine entry

Can new competitors enter?

Step 9 — Examine efficiencies

Does the arrangement produce legitimate benefits?

Step 10 — Examine overall effects

Does the arrangement materially weaken the competitive process?

39. Important Distinction

The following propositions should not be confused:

40. Quick Revision Notes

Loyalty ecosystem

A network of interconnected products, services and incentives designed to retain customers or commercial partners.

Market foreclosure

Restriction of competitors' ability to access customers, suppliers, distribution channels or other competitive opportunities.

Major foreclosure mechanisms

Loyalty rebates

Exclusive dealing

Conditional discounts

Tying

Bundling

Self-preferencing

Interoperability restrictions

Switching costs

Major cases

Hoffmann-La Roche v Commission — loyalty rebates and dominance.

Intel v Commission — effects-based analysis of loyalty rebates.

British Airways v Commission — incentive/commission arrangements.

Tomra v Commission — loyalty arrangements and foreclosure.

Michelin v Commission — dealer rebates and customer loyalty.

United Brands v Commission — dominance and abuse.

Google Shopping — digital platform preferential treatment.

United States v Microsoft — ecosystem and exclusionary conduct.

Lorain Journal v United States — exclusion of rival access to advertisers.

Aspen Skiing v Aspen Highlands — exceptional refusal-to-deal principles.

41. Conclusion

Loyalty ecosystems can promote legitimate competition by providing consumers with rewards, convenience, lower costs and integrated services. The competition-law problem arises when a powerful undertaking uses the ecosystem to make rivals' access to customers or other competitive opportunities unnecessarily difficult.

The most important factors are market power, duration, market coverage, switching costs, network effects, barriers to entry, foreclosure effects and legitimate efficiencies.

The modern competition-law challenge is particularly significant in digital markets because competition may no longer occur merely between individual products. It may occur between entire ecosystems, where control over one layer—such as an operating system, marketplace, payment system or cloud platform—can influence competition throughout connected markets.

Thus, long-term competition policy seeks to preserve the ability of consumers and businesses to switch, multi-home, enter competing ecosystems and support alternative suppliers, while still allowing firms to develop legitimate loyalty programmes and efficient integrated business models.