Exclusive Dealing as Competition for Distribution ‘on the Merits’
44 Pages Posted: 9 Jul 2011 Last revised: 21 Oct 2015
Date Written: 2003
The theory of “raising rivals’ costs” is a creative and original addition to our economic knowledge.1 We now know that a firm may do something that raises its costs if it raises the costs of its rivals even more and results in an increase in its market power. However, the impact of this theoretical concept on antitrust enforcement has been limited, primarily because of the inherent difficulties in distinguishing “raising rivals’ costs” behavior from normal competitive conduct. As Judge Frank Easterbrook succinctly warns: “injuries to rivals are byproducts of vigorous competition.”2 Consequently, “to deter aggressive conduct is to deter competition.”3 The Supreme Court similarly cautions that Section 2 of the Sherman Act should not be applied “against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.”
This paper explains how exclusive distribution contracts often involve “competition on the merits.” The paper makes two main points. First, competition for distribution is shown to be an important part of the normal competitive process that benefits consumers. Although payments for distribution raise the cost to manufacturers of competing, competition among distributors will pass these payments on to consumers. Second, this competition for distribution is shown to often involve the use of exclusives because exclusivity efficiently facilitates contracting between manufacturers and distributors regarding the supply of distributor promotional efforts. In particular, exclusives assure manufacturers that they will receive the distributor promotion they pay for and maximize the return earned by distributors for their promotional efforts.
Note: This paper was originally published in the George Mason Law Review without an abstract.
JEL Classification: L42, K21
Suggested Citation: Suggested Citation