Exclusive dealing
Pages | 223-264 |
CHAPTERVI
EXCLUSIVEDEALING
Thischapterdiscussesthelaw and economics ofexclusive and partial
exclusive dealing arrangements.Inexclusivedealing, a buyer agreesto
purchase goods for a period of timefroma singlesupplier, tothe exclusion
of rival suppliers. Partialexclusivityreferstoarrangementswhere buyers
purchase a substantialshare of theirrequirementsfrom a single supplier,
but notnecessarily 100 percent.Thesetypesofagreementsaregenerally
adopted toincrease a firm’ssalesand reduce itscosts of distribution,
thereby enhancing competition. Under certainmarketconditions,
however, exclusivityarrangementsmay be usedforanticompetitive
purposes orhaveanticompetitiveeffects.
A.Overview
Examples of retaillevelexclusive dealing abound—new automobile
dealerships;gasolinestations;Coke and Pepsisoftdrinksales through
restaurants,movietheaters, and sportsfacilities; and manufacturersselling
through theirownretailoutlets or directvia the Internet.Useof exclusive
dealing inintermediate goods markets,betweenstages of production, is
similarly widespread. Somecommonexamplesinclude hospitals buying
various medical supplies exclusivelyfroma singleseller; thetop
distributors in a product marketagreeingtorepresent only the largest
manufacturer; and manufacturers buying inputs froma singlesource,such
asjet engines for a specifictype of commercialaircraft.In exchange for a
favorableprice or otherfinancialor non-financial considerations, buyers
committoexclusive(orpartiallyexclusive)purchasing from one sellerfor
some period of time.
223
224AntitrustLawandEconomicsofProductDistribution
1.Distributionand Organizational Form
Competitionpressuresfirmsto adopt distribution arrangements that
minimizecosts and increasethedemandfortheir products and services.1
Under competition themostefficientformsof distributionsurvive.Failure
toselectthemostefficient distribution formrelativetoitsrivals’canlead
to declining sales and profits, and potential exitfromthemarket.
2.ExclusiveDealingandAntitrustConcerns
Exclusive dealing has beenchallengedinthe U.S.asan
anticompetitivedeviceforover 100 years.Indeed, concerned thatSections
1 and 2 of theShermanActwereinsufficientto prevent the creationof and
maintenance of monopolies through variousmeans, Congress adopted
Section 3 of the ClaytonActtostop monopolies intheirincipiency.
Section 3 declaresexclusive dealing unlawful ifitseffectmay be to
substantiallylessen competition.2
Dominant firms of thetime, including American Tobacco,General
Film, and United Shoe Machinery,werebelievedto be using exclusionary
practices,includingexclusive dealing agreements,to protect themselves
from competition. Accordingtothe House Report on theClaytonAct,“the
exclusive or tyingcontractmadewithlocaldealersbecomes one of the
greatestagenciesandinstrumentalitiesof monopoly everdevised by the
brain of man.Itcompletely shuts out competitors. . ..”3
Historically, thechiefantitrustconcernwithexclusive dealing was
that a firmcouldcontrolsufficientdistribution—a largeshareofall
distribution—to prevent theentryof rivalfirmsor block the growthof
smallerfirms.By denying business opportunities torivalfirms and thereby
limiting the availability of substituteproducts and servicesforconsumers,
1. Firmsmaymixdistributionarrangements,suchascombiningexclusive
dealingwithresalepricemaintenanceorterritorialareasofprimary
responsibility,aswellasusingmixedchannelsofdistribution,suchas
operatingthroughbothownedandfranchisedoutlets.
2.15U.S.C. § 14(2012).
[Itshallbeunlawfultosellgoodsonthecondition]thatthelessee
orpurchaser . . . shallnotuseordealinthegoods . . . of a competitor
orcompetitorsofthelessororseller,wheretheeffectofsuch . . .
maybetosubstantiallylessencompetitionortendtocreate a
monopolyinanylineofcommerce.
3. H.R.Rep.No.63-627at12-13(1914).
ExclusiveDealing225
exclusive dealing arrangementswereallegedtoraisepricesand restrict
output.
3.AlternativeMeanstoExclusivity
Alternativedistributionarrangementssometimesallegedtohavethe
sameeffectasformalexclusivedealingagreements include: (1)voluntary
buyer commitmentstofullexclusivityinexchangeforpricediscountsand
rebates;(2)pricediscounts conditioned on thelevelofa supplier’s share
of a buyer’s purchases (shortoffullexclusivity)withina product category,
or conditioned on the rate of growth of a buyer’s purchasesfrom a seller
during a time period; and (3)pricediscountsbased on purchasing a bundle
of theseller’sproducts.4
Offering buyers lowerprices or other benefitsinexchangefor
exclusivity,absentan exclusive dealing contract, has beenviewedas a
meanstoforecloserivalssinceatleastthe 1920s. 5Similarly,critics
contend thatshare-price incentive contracts orofferslimitcompetition
fromrivals and new entrants by denying them the abilitytoachievea
minimumscale for efficient operation.6Share-based programs, however,
unlike volume-baseddiscounts, mayhelp levelthe downstream
competitivefieldbecausebothlarge and small buyers canqualifyforthe
samepercentageshare-based discounts.
denied, 133S.Ct.2025(2013);Se.Mo.Hosp.v.BardInc.,642F.3d608
(8thCir.2010);AlliedOrthopedicAppliances,Inc.v.TycoHealthcareGrp.,
F.3d883(9thCir.2008);LePage’sInc.v.3M,324F.3d141(3dCir.2003)
(enbanc),cert.denied, 542U.S.953(2004);UnitedStatesv.Microsoft
Corp.,253F.3d34,(D.C.Cir.)(enbanc),cert.denied, 534U.S.952(2001).
5. SeeRichardM.Steuer,DiscountsandExclusiveDealing, 7 ANTITRUST28
(1993).UnitedShoeMachineryCorporationofferedpricediscountsif
lesseesagreedtoexclusiveuseofitsshoemakingmachinery.UnitedShoe
Mach.Corp.v.UnitedStates,258U.S.451(1922);UnitedStatesv.United
ShoeMachineryCorp.,110F.Supp.295(D.Mass.1953),aff’dpercuriam,
practices,seeScottE.Masten & EdwardA.Snyder,UnitedStatesv.United
ShoeMachineryCorporation:OntheMerits, 36J.L. & ECON. 33(1993).
6. See,e.g., EinerElhauge,Tying,BundledDiscounts,andtheDeathofthe
SingleMonopolyProfitTheory, 123 HARV. L. REV. 397(2009);WillardK.
Tometal.,AnticompetitiveAspectsofMarket-ShareDiscountsandOther
IncentivestoExclusiveDealing, 67 ANTITRUSTL.J.615(2000).
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