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.

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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).

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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.

4. See,e.g.,ZFMeritor,LLCv.EatonCorp.,696F.3d254(3dCir.2012),cert.

denied, 133S.Ct.2025(2013);Se.Mo.Hosp.v.BardInc.,642F.3d608

(8thCir.2010);AlliedOrthopedicAppliances,Inc.v.TycoHealthcareGrp.,

LP,592F.3d991(9thCir.2010);CascadeHealthSols. v.PeaceHealth,515

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,

347U.S.521(1954).ForefficiencyexplanationsofvariousUnitedShoe

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).