Exclusive Dealing

Definition

Exclusive dealing is a vertical restraint where a supplier requires a buyer to purchase all or most of its products from that supplier, preventing the buyer from purchasing from the supplier's competitors. This practice can limit competition and raise concerns about anticompetitive behavior.

5 Must Know Facts For Your Next Test

1. Exclusive dealing can foreclose market access for the supplier's competitors, reducing their ability to compete effectively.
2. The anticompetitive effects of exclusive dealing are more likely when the supplier has significant market power and the exclusive dealing covers a substantial portion of the relevant market.
3. Exclusive dealing may provide procompetitive benefits, such as ensuring a reliable supply of inputs or encouraging investments in specific assets, which can offset the potential anticompetitive harms.
4. Regulators often analyze the duration of exclusive dealing contracts, the percentage of the market covered, and the availability of alternative suppliers when assessing the legality of these arrangements.
5. In the U.S., exclusive dealing is evaluated under the rule of reason, which balances the anticompetitive and procompetitive effects to determine the overall impact on competition and consumer welfare.

Review Questions

• Explain how exclusive dealing can limit competition in a market.
  • Exclusive dealing arrangements can limit competition by foreclosing market access for the supplier's competitors. When a supplier requires a buyer to purchase all or most of its products, it prevents the buyer from purchasing from the supplier's competitors. This can make it difficult for the competitors to reach a sufficient number of customers, reducing their ability to compete effectively. The anticompetitive effects are more likely when the supplier has significant market power and the exclusive dealing covers a substantial portion of the relevant market.
• Describe the potential procompetitive benefits of exclusive dealing arrangements.
  • Exclusive dealing arrangements may provide procompetitive benefits that can offset the potential anticompetitive harms. For example, exclusive dealing can ensure a reliable supply of inputs, which can encourage investments in specific assets and improve efficiency. Additionally, exclusive dealing may help a supplier build brand loyalty or prevent free-riding on its marketing efforts. Regulators often analyze the duration of exclusive dealing contracts, the percentage of the market covered, and the availability of alternative suppliers when assessing the legality of these arrangements.
• Analyze how the rule of reason approach is used to evaluate the legality of exclusive dealing arrangements in the U.S.
  • In the U.S., exclusive dealing arrangements are evaluated under the rule of reason, which requires a balancing of the anticompetitive and procompetitive effects to determine the overall impact on competition and consumer welfare. This approach involves a comprehensive analysis of factors such as the market power of the supplier, the duration and coverage of the exclusive dealing contracts, the availability of alternative suppliers, and the potential efficiency justifications for the arrangement. The goal is to assess whether the exclusive dealing practice is likely to harm competition and consumer welfare, or if the procompetitive benefits outweigh the anticompetitive effects.

Related terms

Vertical Restraint: A restriction imposed by a firm at one level of the supply chain on the commercial conduct of a firm at another level of the supply chain.

Tying Arrangement: A vertical restraint where a seller requires a buyer to purchase one product (the tying product) in order to purchase a second product (the tied product).

Monopolistic Behavior: Actions taken by a firm with significant market power to maintain or increase its dominance, often at the expense of competition and consumer welfare.