Exclusive dealing

• Pages: 223-264

CHAPTER VI

EXCLUSIVE DEALING

This chapter discusses the law and economics of exclusive and partial

exclusive dealing arrangements. In exclusive dealing, a buyer agrees to

purchase goods for a period of time from a single supplier, to the exclusion

of rival suppliers. Partial exclusivity refers to arrangements where buyers

purchase a substantial share of their requirements from a single supplier,

but not necessarily 100 percent. These types of agreements are generally

adopted to increase a firm’s sales and reduce its costs of distribution,

thereby enhancing competition. Under certain market conditions,

however, exclusivity arrangements may be used for anticompetitive

purposes or have anticompetitive effects.

A. Overview

Examples of retail level exclusive dealing abound—new automobile

dealerships; gasoline stations; Coke and Pepsi soft drink sales through

restaurants, movie theaters, and sports facilities; and manufacturers selling

through their own retail outlets or direct via the Internet. Use of exclusive

dealing in intermediate goods markets, between stages of production, is

similarly widespread. Some common examples include hospitals buying

various medical supplies exclusively from a single seller; the top

distributors in a product market agreeing to represent only the largest

manufacturer; and manufacturers buying inputs from a single source, such

as jet engines for a specific type of commercial aircraft. In exchange for a

favorable price or other financial or non-financial considerations, buyers

commit to exclusive (or partially exclusive) purchasing from one seller for

some period of time.

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224 Antitrust Law and Economics of Product Distribution

1. Distribution and Organizational Form

Competition pressures firms to adopt distribution arrangements that

minimize costs and increase the demand for their products and services.1

Under competition the most efficient forms of distribution survive. Failure

to select the most efficient distribution form relative to its rivals’ can lead

to declining sales and profits, and potential exit from the market.

2. Exclusive Dealing and Antitrust Concerns

Exclusive dealing has been challenged in the U.S. as an

anticompetitive device for over 100 years. Indeed, concerned that Sections

1 and 2 of the Sherman Act were insufficient to prevent the creation of and

maintenance of monopolies through various means, Congress adopted

Section 3 of the Clayton Act to stop monopolies in their incipiency.

Section 3 declares exclusive dealing unlawful if its effect may be to

substantially lessen competition.2

Dominant firms of the time, including American Tobacco, General

Film, and United Shoe Machinery, were believed to be using exclusionary

practices, including exclusive dealing agreements, to protect themselves

from competition. According to the House Report on the Clayton Act, “the

exclusive or tying contract made with local dealers becomes one of the

greatest agencies and instrumentalities of monopoly ever devised by the

brain of man. It completely shuts out competitors. . ..”3

Historically, the chief antitrust concern with exclusive dealing was

that a firm could control sufficient distribution—a large share of all

distribution—to prevent the entry of rival firms or block the growth of

smaller firms. By denying business opportunities to rival firms and thereby

limiting the availability of substitute products and services for consumers,

1. Firms may mix distribution arrangements, such as combining exclusive

dealing with resale price maintenance or territorial areas of primary

responsibility, as well as using mixed channels of distribution, such as

operating through both owned and franchised outlets.

2. 15U.S.C. § 14 (2012).

[It shall be unlawful to sell goods on the condition] that the lessee

or purchaser . . . shall not use or deal in the goods . . . of a competitor

or competitors of the lessor or seller, where the effect of such . . .

may be to substantially lessen competition or tend to create a

monopoly in any line of commerce.

3. H.R. Rep. No. 63-627 at 12-13 (1914).

Exclusive Dealing 225

exclusive dealing arrangements were alleged to raise prices and restrict

output.

3. Alternative Means to Exclusivity

Alternative distribution arrangements sometimes alleged to have the

same effect as formal exclusive dealing agreements include: (1) voluntary

buyer commitments to full exclusivity in exchange for price discounts and

rebates; (2) price discounts conditioned on the level of a supplier’s share

of a buyer’s purchases (short of full exclusivity) within a product category,

or conditioned on the rate of growth of a buyer’s purchases from a seller

during a time period; and (3) price discounts based on purchasing a bundle

of the seller’s products.4

Offering buyers lower prices or other benefits in exchange for

exclusivity, absent an exclusive dealing contract, has been viewed as a

means to foreclose rivals since at least the 1920s. 5 Similarly, critics

contend that share-price incentive contracts or offers limit competition

from rivals and new entrants by denying them the ability to achieve a

minimum scale for efficient operation.6 Share-based programs, however,

unlike volume-based discounts, may help level the downstream

competitive field because both large and small buyers can qualify for the

same percentage share-based discounts.

4. See, e.g., ZF Meritor, LLC v. Eaton Corp., 696F.3d 254 (3d Cir. 2012), cert.

denied, 133S. Ct. 2025 (2013); Se. Mo. Hosp. v. Bard Inc., 642F.3d 608

(8th Cir. 2010); Allied Orthopedic Appliances, Inc. v. Tyco Healthcare Grp.,

LP, 592F. 3d 991 (9th Cir. 2010); Cascade Health Sols. v. PeaceHealth, 515

F.3d 883 (9th Cir. 2008); LePage’s Inc. v. 3M, 324F.3d 141 (3d Cir. 2003)

(en banc), cert. denied, 542U.S. 953 (2004); United States v. Microsoft

Corp., 253F.3d 34, (D.C. Cir.) (en banc), cert. denied, 534 U.S. 952 (2001).

5. See Richard M. Steuer, Discounts and Exclusive Dealing, 7 ANTITRUST 28

(1993). United Shoe Machinery Corporation offered price discounts if

lessees agreed to exclusive use of its shoe making machinery. United Shoe

Mach. Corp. v. United States, 258U.S. 451 (1922); United States v. United

Shoe Machinery Corp., 110 F. Supp. 295 (D. Mass. 1953), aff’d per curiam,

347U.S. 521 (1954). For efficiency explanations of various United Shoe

practices, see Scott E. Masten & Edward A. Snyder, United States v. United

Shoe Machinery Corporation: On the Merits, 36 J.L. & ECON. 33 (1993).

6. See, e.g., Einer Elhauge, Tying, Bundled Discounts, and the Death of the

Single Monopoly Profit Theory, 123 HARV. L. REV. 397 (2009); Willard K.

Tom et al., Anticompetitive Aspects of Market-Share Discounts and Other

Incentives to Exclusive Dealing, 67 ANTITRUST L.J. 615 (2000).