Antitrust Analysis of Category Management: Conwood v. United States Tobacco Co.

Abstract:     
Category management refers generally to the process by which retailers select products to stock, display, promote, advertise, and price within a product category. Category management contracts involve a retailer designating a particular manufacturer as the “category captain”, who has influence over which products in a product category are stocked, as well as how they are displayed, promoted, and priced. Category management contracts have attracted antitrust scrutiny in recent years, exemplified by the Sixth Circuit’s recent decision in Conwood Co. v. United States Tobacco Co., which held that United States Tobacco’s abuse of its position as category captain, exclusionary arrangements, misleading statements and destruction of rivals’ products violated Section 2 of the Sherman Act. Conwood is an especially important candidate for detailed economic and legal analysis for two reasons. The first is that antitrust commentators have almost universally agreed that Conwood is an example of “cheap exclusion” or more generally, a monopolization enforcement action that belongs to an identifiable category of cases involving significant threats to competitive harm without plausible efficiency justifications. The second reason is that Conwood can be viewed as part of a broader trend toward increased scrutiny of distribution contracts that explicitly or implicitly restrict the display, promotion, or sale of rival products by retailers.

Our analysis of the facts in Conwood challenges the conventional wisdom that it is an example of “cheap exclusion” and concludes that competitive harm was unlikely. Further, we provide a pro- competitive justification for category management contracts delegating shelf space decisions to the manufacturer as a form of partial exclusive dealing contract which grant a manufacturer access to preferred shelf space but do not completely exclude rivals.

Keywords: category management, exclusive dealing, vertical restraints, slotting allowances, antitrust

JEL Classifications: L42, D23

Accepted Paper Series