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.
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
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).

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