In Economics and Law, exclusive dealing arises when a supplier entails the buyer by placing limitations on the rights of the buyer to choose what, who and where they deal.[1] This is against the law in most countries which include the USA, Australia and Europe when it has a significant impact of substantially lessening the competition in an industry.[2] When the sales outlets are owned by the supplier, exclusive dealing is because of vertical integration,[3] where the outlets are independent exclusive dealing is illegal (in the US)[4] due to the Restrictive Trade Practices Act, however, if it is registered and approved it is allowed. While primarily those agreements imposed by sellers are concerned with the comprehensive literature on exclusive dealing, some exclusive dealing arrangements are imposed by buyers instead of sellers.[5]
Exclusive dealing can be considered as a barrier to entry[6] especially in market that operate under imperfect competition, which is either Monopoly or Oligopoly where there is price and product differentiation as well as an imbalance of market power between incumbent, entrants and competitors due to the existing of vertical integrations within the market, leading to market inefficiencies.
In Australian Law
Alternative methods of exclusive dealing are prohibited by Section 47 of the CCA. Broadly, anti-competitive vertical transactions are prohibited
(1)" the conditional supply (or acquisition) of goods or services (conditions may relate to the ability to re-supply, exclusivity, limits on ability to acquire from competitors etc)
(2) refusing to supply for specified reasons (eg, because purchaser refuses to agree to a conditional supply)"
All exclusive trade is recorded only if it can be demonstrated, to have the impact of substantially lessening competition (s 47(10)).[7]
In British politics
In British politics, 'exclusive dealing' was, before the introduction of the secret ballot by the Ballot Act 1872, a means by which those without the vote could exert pressure on shopkeepers etc. – a policy that any shopkeeper voting against the popular candidate would lose the custom of non-voters of an opposite persuasion. The practice was much the same as a modern boycott; it was effective for the Radicals in some borough constituencies,[8] and they were therefore wary of any offer or attempt to introduce the secret ballot ahead of a substantial extension of the franchise.
In European Union Law
Exclusive dealing agreements under the Article 102 of the Treaty on the Functioning of the European Union are the Vertical agreements that bind the customer to purchase all or most of a specific type of goods or services only from the dominant supplier. The term exclusive dealing agreement refers to an arrangement under which the supplier is restricted in their ability to supply anyone other than the specific down-stream customer and vice versa. The Commission stated in Guidelines on Vertical Restraints[9] that agreements binding to purchase goods of 80% or more, will be caught in line with the meaning of exclusive dealings and may be determined abusive, see Case 85/76.[10] An exclusive purchase agreement is not per se illegal under Article 102 (see Case C-413/14) [11] and can only be deemed abusive if it can be capable having a foreclosure effect on as-efficient competitors and has no objective justification, see.[12] Hence, a defence that the customer willingly entered into agreement will not suffice; the question is whether the agreement might horizontally foreclose competitors as efficient (or more) that the dominant company in the appropriate market, see Case 85/76[13] and Case C-393/92.[14]
In Economics and Law, there are many forms of exclusive dealing, however the three most commonly known are:
De facto/Partial exclusive dealing
Third line forcing
Full line forcing
De facto/Partial exclusive dealing
De Facto, also known as partial exclusive dealing,[15] occurs in the presence of:
Loyalty discounts, a discount when buyer purchases majority of goods from one supplier[16]
Slotting allowances, the supplier pays a fee to secure shelf space from the buyer
Requirements contracts, agreement to purchase all units form one supplier, as buyer cannot purchase from any other supplier in the market , which is a term stated in a buyer/supplier contract
Third Line Forcing
Third line forcing involves the supply of goods or services on condition that the purchaser acquires goods or services from a particular third party, or a refusal to supply because the purchaser will not agree to that condition.[2]
Elements of Third line Forcing
purchaser wants a specific product , but the purchase of another product is forced on them;
The business forces the product of a third party onto the purchaser;
Forced purchase of third part's product in order to obtain desired product
Third line forcing is prohibited when it has a substantially lessening impact of competition in the industry[17]
Case Illustrating Third Line Forcing
Australian Consumer & Competition Commission v Black & White Cabs (Australia) [2010][18]
Facts: A number of operators were required by Black and White Cabs to acquire services from Cabcharge Australia Ltd (an unrelated third party online payment transaction business). B&W Cabs recognised that it had violated antitrust law and that the proposed relief was appropriate.
Held: Black and white Cabs was held guilty, as they engaged in third line exclusive exclusive dealing under the Australian law s 47(6) prohibited by s 47(1) by supplying their services under the conception that the taxi-cab network has to acquire services from Cabcharge Australia Ltd , a third part unrelated business in order to have access to Black and White Cab's services.
Penalties and Remedies Restraining B&W Cabs from providing or promising to provide, taxi booking, dispatch or other services to authorised taxi service operators, so that other products and/or services, including digital payment services, are acquired by licensed taxi service operators from any third party not associated to B&W Cabs, including Cabcharge, for a five year term.The condition of the penalty were as follows:
that B&W Cabs create, retain and implement Trade Practices Enforcement and Education / Training Program for a three-year duration
that B&W Cabs issue letters to all licensed taxi service operators who have purchased such services from B&W Cabs
B&W Cabs pay a $110,000 cash penalty. To be billed in instalments.
B&W Cabs spend $10,000 towards ACCC expenditures.
Examples of Third Line Forcing
Tied petrol stations that only deal with one petroleum supplier or seller.
Public houses tied to breweries.
Franchisees forced to buy product from a host company instead of a local provider.
Full line Forcing is also known as exclusive purchasing as it limited the buyer to only purchasing and stocking the product of one supplier also regarded to as single branding. A business is said to have engaged in Full line forcing, if it imposes the following conditions on the buyer:
to not purchase products from a competitor; or
to not resupply products purchased from a competitor; or
to not resupply its product to a particular place.[19]
Full line forcing breaches the law if it is proven to have a substantially lessening effect on competition in the industry. This is identified by the substantial lessening competition test.[2]
Case illustrating Full Line Forcing
Trade Practices Commission v. Massey Ferguson (Australia) Ltd. (1983)[20]
Facts The respondent agreed to supply agricultural farm machinery sold under the name "Massey Ferguson" in September and October 1977 to "Wood 's West Port Machinery" of Koo Wee Rup, Victoria, on condition that they would not purchase agricultural tractors directly or indirectly from a competitor of the respondent. The respondent declined to supply agricultural tractors and headers to "Central Engineers" of Temora, N.S.W. in 1978 on the grounds that it had agreed with a supplier to not acquire products from its competitors, therefore, it would be breaking the contract rules.
Held: In a case against the respondent with regard to three products of exclusive dealing in violation of the Australian Consumer and Competition Law The respondent admitted to 47(1) of the Trade Practices Act 1974 the conduct likely to have the effect of significantly reducing competition for agricultural tractors and/or headers on the wholesale market in Australia. With regard to the effective penalty to be levied pursuant to s76.
Therefore, acts of exclusive dealing were not present, however, the acts committed by Massey had the likely impact of leading to the substantial lessening competition as it was done unknowingly. However, since it would lead to less competition in the industry, they are to be penalised for such behaviour. The respondent's actions aided to substantially lessening competition in the Australian wholesale market for tractors and headers.
Penalties and Remedies The penalty and remedies included a once of payment of $40,00 as well as the correction of the neglectful behaviour of the defendant to ensure that they are knowledgeable of the repercussions of practicing full-line forcing either International or unintentionally in the market.
Substantial Lessening Competition Test
It is not sufficient to prove that a business has been damaged, under the substantial lessening test certain conditions have to be met to confirm that a business has breached the law. An analysis of the following factors must be conducted in order to conclude that the behaviour of a supplier is substantially lessening competition when the whole market for the product is impacted as well as the product substitute and if the refusal of supply of desired product would substantially affect the availability of the product to customers.[21]
Industry Impacts of Exclusive Dealing
Exclusive dealing can offer a significant competitive advantage for businesses, however it can also pose threats such as anticompetitive risks.The most commonly known issue of exclusive dealing is called Customer foreclosure.[22] Customer foreclosure is an exercise of market power by upstream suppliers, it occurs where a large number of customers cannot be accessed by the competitors, which in turn reduces the efficiency of these downstream firms.As a result of this the more dominant firm has the ability to reduce quantity or to increase the price of products at its disposal due to weakened competition from its competitors.[23] This leaves customers vulnerable as there are forced to buy from the dominant supplier.[15]
It is typically a seller who imposes exclusivity in the literature on exclusive dealing.The reason for the restraint of a seller may be procompetitive, such as preventing rival suppliers from:
freely riding on the investments of the seller in the sales efficiency of a retailer.Efficiency reasons for exclusive dealing are:
Encouraging distributors to actively promote goods from a manufacturer
Encourages suppliers to help distributors by proving more information
Eliminating the free rider problem amongst suppliers
Allowing the control of distribution quality by suppliers[24]
Exclusive dealing induced by the seller may also lead to anticompetitive behaviour. This is true if it leads to. a foreclosure that removes competitors from a large portion of the market for a prolonged time period.This is also true in the case of an entrant where the dominant incumbent can deter the entry of an efficient entrant though the practice of exclusive dealing. Inefficient results for exclusive dealing are:
Price decrease and an overall decrease in market output
Increase in the dominant's firm's market share as well as the amount of product distributed
Less competitors in the market as they are forced to exist due to exclusive dealing
Incumbents have increase market power as they are bale to deter entry of new entrants to the market[15]
Buyer Induced Exclusive Dealing
Exclusive dealing is commonly known as a supplier induced act, however the buyer has the power to influence exclusive dealing through multiple methods.[25] At the manufacturing point, there is more market influence downstream than upstream in certain distribution networks because "consumers are more likely to switch products inside the supermarket than switch brand stores".[26] Dobson (2008) noted that "buyer-led constraints most frequently occur when the buyer has some negotiating advantage over suppliers that guarantees their compliance or consent.[27]
The consumer-welfare consequences of exclusive dealings caused by buyers are not apparent. If a dealer sticks to a single supplier of a marketed consumer product, exclusive dealing decreases the options of customers.[28] Those customers who may not find their favourite brand in stock at a retailer must either choose a different brand or a different retailer in the face of restricted brand availability. It is true that reducing the selection of choices is harmful to the welfare of customers, but it is also possible that this form of exclusion is possible.[5]
There have been two investigations to prove the existence of buyer induced exclusive dealing by Gabrielsen and Sørgard (1999)[29] as well as Klein and Murphy (2008) [30] Investigate purchaser-induced exclusive dealings with a monopoly manufacturer and two suppliers of a distinct commodity. In the model Gabrielsen and Sørgard (1999) suggests that the retailer chooses, ex ante, whether to solicit exclusive or non-exclusive delivery bids from suppliers. Wholesale rates are, in any case, dictated by Bertrand competition model between suppliers. Next, the retailer marks up selling rates for resale to buyers in a double-marginalization strategy. The retailer can opt for an exclusive trading deal with one of the manufacturers, based on customer demand for the brands[29] and Klein and Murphy (2008).[30]
Klein and Murphy (2008)[30]'s model suggests that "the retailer has buyer control in the upstream market but faces downstream competition in a model of one retailer and two suppliers with a differentiated commodity." Competitors persuade the firm to charge retail rates that barely cover operational costs. The model also assumes that the retailer distributes single brand products. The model also indicates that there is no incentive for the retailer to attempt or pursue the distribution of products form more than one manufacturer, as the retailer will conduct a procurement auction to determine the product it will distribute. This situation leads to the utilisation of the Bertrand competition to drive wholesale prices down as well as manufacturers costs.[30]
↑ Sass, Tim R. (April 2005). "The competitive effects of exclusive dealing: Evidence from the U.S. beer industry". International Journal of Industrial Organization. 23 (3–4): 203–225. doi:10.1016/j.ijindorg.2005.01.006.
↑ Zenger, Hans (2010). "When Does Exclusive Dealing Intensify Competition for Distribution - Comment on Klein and Murphy". Antitrust Law Journal. 77 (1): 205–211. SSRN1762864.
A monopoly, as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a specific person or enterprise is the only supplier of a particular thing. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly and duopoly which consists of a few sellers dominating a market. Monopolies are thus characterised by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices, which is associated with a decrease in social surplus. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.
In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market. Imperfect competition causes market inefficiencies, resulting in market failure. Imperfect competition usually describes behaviour of suppliers in a market, such that the level of competition between sellers is below the level of competition in perfectly competitive market conditions.
The Clayton Antitrust Act of 1914, is a part of United States antitrust law with the goal of adding further substance to the U.S. antitrust law regime; the Clayton Act seeks to prevent anticompetitive practices in their incipiency. That regime started with the Sherman Antitrust Act of 1890, the first Federal law outlawing practices that were harmful to consumers. The Clayton Act specified particular prohibited conduct, the three-level enforcement scheme, the exemptions, and the remedial measures.
The Robinson–Patman Act (RPA) of 1936 is a United States federal law that prohibits anticompetitive practices by producers, specifically price discrimination.
In the United States, antitrust law is a collection of mostly federal laws that regulate the conduct and organization of businesses to promote competition and prevent unjustified monopolies. The three main U.S. antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These acts serve three major functions. First, Section 1 of the Sherman Act prohibits price fixing and the operation of cartels, and prohibits other collusive practices that unreasonably restrain trade. Second, Section 7 of the Clayton Act restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly. Third, Section 2 of the Sherman Act prohibits monopolization.
Price fixing is an anticompetitive agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand.
Distribution is the process of making a product or service available for the consumer or business user who needs it, and a distributor is a business involved in the distribution stage of the value chain. Distribution can be done directly by the producer or service provider or by using indirect channels with distributors or intermediaries. Distribution is one of the four elements of the marketing mix: the other three elements being product, pricing, and promotion.
The list price, also known as the manufacturer's suggested retail price (MSRP), or the recommended retail price (RRP), or the suggested retail price (SRP) of a product is the price at which its manufacturer notionally recommends that a retailer sell the product.
Anti-competitive practices are business or government practices that prevent or reduce competition in a market. Antitrust laws ensure businesses do not engage in competitive practices that harm other, usually smaller, businesses or consumers. These laws are formed to promote healthy competition within a free market by limiting the abuse of monopoly power. Competition allows companies to compete in order for products and services to improve; promote innovation; and provide more choices for consumers. In order to obtain greater profits, some large enterprises take advantage of market power to hinder survival of new entrants. Anti-competitive behavior can undermine the efficiency and fairness of the market, leaving consumers with little choice to obtain a reasonable quality of service.
In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or have not had to incur. Because barriers to entry protect incumbent firms and restrict competition in a market, they can contribute to distortionary prices and are therefore most important when discussing antitrust policy. Barriers to entry often cause or aid the existence of monopolies and oligopolies, or give companies market power. Barriers of entry also have an importance in industries. First of all it is important to identify that some exist naturally, such as brand loyalty. Governments can also create barriers to entry to meet consumer protection laws, protecting the public. In other cases it can also be due to inherent scarcity of public resources needed to enter a market.
Business-to-business is a situation where one business makes a commercial transaction with another. This typically occurs when:
The Competition and Consumer Act 2010 (CCA) is an Act of the Parliament of Australia. Prior to 1 January 2011, it was known as the Trade Practices Act 1974 (TPA). The Act is the legislative vehicle for competition law in Australia, and seeks to promote competition, fair trading as well as providing protection for consumers. It is administered by the Australian Competition & Consumer Commission (ACCC) and also gives some rights for private action. Schedule 2 of the CCA sets out the Australian Consumer Law (ACL). The Federal Court of Australia has the jurisdiction to determine private and public complaints made in regard to contraventions of the Act.
A requirements contract is a contract in which one party agrees to supply as much of a good or service as is required by the other party, and in exchange the other party expressly or implicitly promises that it will obtain its goods or services exclusively from the first party. For example, a grocery store might enter into a contract with the farmer who grows oranges under which the farmer would supply the grocery store with as many oranges as the store could sell. The farmer could sue for breach of contract if the store were thereafter to purchase oranges for this purpose from any other party. The converse of this situation is an output contract, in which one buyer agrees to purchase however much of a good or service the seller is able to produce.
Vertical restraints are competition restrictions in agreements between firms or individuals at different levels of the production and distribution process. Vertical restraints are to be distinguished from so-called "horizontal restraints", which are found in agreements between horizontal competitors. Vertical restraints can take numerous forms, ranging from a requirement that dealers accept returns of a manufacturer's product, to resale price maintenance agreements setting the minimum or maximum price that dealers can charge for the manufacturer's product.
Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992), is a 1992 Supreme Court decision in which the Court held that even though an equipment manufacturer lacked significant market power in the primary market for its equipment—copier-duplicators and other imaging equipment—nonetheless, it could have sufficient market power in the secondary aftermarket for repair parts to be liable under the antitrust laws for its exclusionary conduct in the aftermarket. The reason was that it was possible that, once customers were committed to the particular brand by having purchased a unit, they were "locked in" and no longer had any realistic alternative to turn to for repair parts.
Standard Oil Co. v. United States, 337 U.S. 293 (1949), more commonly referred to as the Standard Stations case to distinguish it from a 1911 case with the same caption, Standard Oil Co. v. United States, is a 1947 decision of the United States Supreme Court in which requirements contracts for gasoline stations were held to violate section 3 of the Clayton Act. That statute prohibits selling goods on the condition that the customer must not deal in the goods of a competitor of the seller, such as in a requirements contract, if the effect is to "substantially lessen competition" or "tend to create a monopoly." The doctrine of this case has been referred to as "quantitative substantiality," and its exact contours were unsettled and controversial for many years until the Supreme Court authoritatively explained it in United States v. Philadelphia National Bank.
Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320 (1961), the Tampa Electric case, was a 1961 decision of the Supreme Court that, together with United States v. Philadelphia National Bank, clarified the legal test for determining whether requirements contracts "may substantially lessen competition" or "tend to create a monopoly" for purposes of section 3 of the Clayton Antitrust Act.
FTC v. Motion Picture Advertising Service Co., 344 U.S. 392 (1953), was a 1953 decision of the United States Supreme Court in which the Court held that, where exclusive output contracts used by one company "and the three other major companies have foreclosed to competitors 75 percent of all available outlets for this business throughout the United States" the practice is "a device which has sewed up a market so tightly for the benefit of a few [that it] falls within the prohibitions of the Sherman Act, and is therefore an 'unfair method of competition' " under § 5 of the FTC Act. In so ruling, the Court extended the analysis under § 3 of the Clayton Act of requirements contracts that it made in the Standard Stations case to output contracts brought under the Sherman or FTC Acts.
A hub-and-spoke conspiracy is a legal construct or doctrine of United States antitrust and criminal law. In such a conspiracy, several parties ("spokes") enter into an unlawful agreement with a leading party ("hub"). The United States Court of Appeals for the First Circuit explained the concept in these terms:
In a "hub-and-spoke conspiracy," a central mastermind, or "hub," controls numerous "spokes," or secondary co-conspirators. These co-conspirators participate in independent transactions with the individual or group of individuals at the "hub" that collectively further a single, illegal enterprise.
LePage's Inc. v. 3M, 324 F.3d 141, is a 2003 en banc decision of the United States Court of Appeals for the Third Circuit upholding a jury verdict against bundling. Bundling is the setting of the total price of a purchase of several products or services over a period from one seller at a lower level than the sum of the prices of the products or services purchased separately from several sellers over the period. Typically, one of the bundled items is available only from the seller engaging in the bundling, while the other item or items can be obtained from several sellers. The effect of the bundling is to divert purchasers who need the primary product to the bundling seller and away from other sellers of only the secondary product. For that reason, the practice may be held an antitrust violation as it was in the LePage's case, in which the Third Circuit held that 3M engaged in monopolization in violation of Sherman Act § 2 by (1) offering rebates to customers conditioned on purchases spanning six of 3M's different product lines, and (2) entering into contracts that expressly or effectively required dealing exclusively with 3M.
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