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Slide 1

Exclusive Dealing

Howard P. Marvel

Department of Economics and Moritz College of Law
The Ohio State University

FTC/DOJ Hearings: Single-Firm Conduct–Exclusive Dealing,
November 15, 2006

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Slide 2

  • Exclusive dealing is very common

    • Häagen Dazs

    • Car dealers

    • Gas stations

    • Beer distribution

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Slide 3

  • Exclusive dealing is very common

    • Häagen Dazs

    • Car dealers

    • Gas stations

    • Beer distribution

  • Most common for market leaders (Anheuser Busch, not smaller brewers)

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Slide 4

  • Exclusive dealing is very common

    • Häagen Dazs

    • Car dealers

    • Gas stations

    • Beer distribution

  • Most common for market leaders (Anheuser Busch, not smaller brewers)

  • Old rule:

    Exclusion

    plus “dominance”

    = violation

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Slide 5

  • Exclusive dealing is very common

    • Häagen Dazs

    • Car dealers

    • Gas stations

    • Beer distribution

  • Most common for market leaders (Anheuser Busch, not smaller brewers)

  • Old rule:

    Exclusion (not foreclosure)

    plus “dominance”

    = violation

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Slide 6

Vertical restraints create property rights.

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Slide 7

Vertical restraints create property rights.

  • Exclusive territories.

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Slide 8

Vertical restraints create property rights.

  • Exclusive territories.

    • Creates a property right for customers the distributor generates.

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Slide 9

Vertical restraints create property rights.

  • Exclusive territories.

    • Creates a property right for customers the distributor generates.

  • Resale price maintenance.

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Slide 10

Vertical restraints create property rights.

  • Exclusive territories.

    • Creates a property right for customers the distributor generates.

  • Resale price maintenance.

    • Creates a property right for the services that the distributor provides.

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Slide 11

Vertical restraints create property rights.

  • Exclusive territories.

    • Creates a property right for customers the distributor generates.

  • Resale price maintenance.

    • Creates a property right for the services that the distributor provides.

  • Exclusive dealing.

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Slide 12

Vertical restraints create property rights.

  • Exclusive territories.

    • Creates a property right for customers the distributor generates.

  • Resale price maintenance.

    • Creates a property right for the services that the distributor provides.

  • Exclusive dealing.

    • Creates a property right for customers the supplier pulls in.

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Slide 13

  • For territories and RPM, supplier creates and polices a restraint for somebody else.

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Slide 14

  • For territories and RPM, supplier creates and polices a restraint for somebody else.

  • For exclusive dealing, the property right is for the creator and monitor of the right.

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Slide 15

  • Manufacturer invests in product, reputation, to bringin customers.

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Slide 16

  • Manufacturer invests in product, reputation, to bringin customers.

  • Manufacturer confers its customers onto dealers cloaked in its reputation.

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Slide 17

  • Manufacturer invests in product, reputation, to bringin customers.

  • Manufacturer confers its customers onto dealers cloaked in its reputation.

  • Customer cost is included in the charge for the product.

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Slide 18

  • Manufacturer invests in product, reputation, to bringin customers.

  • Manufacturer confers its customers onto dealers cloaked in its reputation.

  • Customer cost is included in the charge for the product.

  • Dealer avoids charge through “bait-and-switch.”

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Slide 19

 

 

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Slide 20

  • Can you hear me now? Hearing aids.

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Slide 21

  • Can you hear me now? Hearing aids.

  • Counter factual hard to prove until it is too late.

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Slide 22

  • Can you hear me now? Hearing aids.

  • Counter factual hard to prove until it is too late. Manufacturers did not recognize role of exclusive dealing, ended up corpses.

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Slide 23

Exclusive dealing problems come from lock-in through contracts.

  • Aghion-Bolton

  • Ramseyer, Rasmussen, and Wiley; Segal and Whinston

No contract, no problem.

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Slide 24

We appreciate the potential reply that it is impossible to say that a given practice “never” could injure consumers. A creative economist could imagine unusual combinations of costs, elasticities, and barriers to entry that would cause injury in the rare situation. ... But ... antitrust law applies rules of per se legality to practices that almost never injure consumers.

[T]he literature on anticompetitive exclusive dealing largely has focused on producing “possibility results” in simple market ettings ... to counter Chicago School arguments...

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Slide 25

We appreciate the potential reply that it is impossible to say that a given practice “never” could injure consumers. A creative economist could imagine unusual combinations of costs, elasticities, and barriers to entry that would cause injury in the rare situation. ... But ... antitrust law applies rules of per se legality to practices that almost never injure consumers.
Frank Easterbrook, Schor v. Abbott Laboratories 457 F.3d 608 (7th Cir. 2006)

[T]he literature on anticompetitive exclusive dealing largely has focused on producing “possibility results” in simple market ettings ... to counter Chicago School arguments...

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Slide 26

We appreciate the potential reply that it is impossible to say that a given practice “never” could injure consumers. A creative economist could imagine unusual combinations of costs, elasticities, and barriers to entry that would cause injury in the rare situation. ... But ... antitrust law applies rules of per se legality to practices that almost never injure consumers.
Frank Easterbrook, Schor v. Abbott Laboratories 457 F.3d 608 (7th Cir. 2006)

[T]he literature on anticompetitive exclusive dealing largely has focused on producing “possibility results” in simple market ettings ... to counter Chicago School arguments...
Michael D. Whinston, Lectures on Antitrust Economics, p. 178.

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Slide 27

 

 

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Slide 28

  • Problems are possible (foreclosure).

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Slide 29

  • Problems are possible (foreclosure).

  • Benefits are hard to prove.

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Slide 30

  • Problems are possible (foreclosure).

  • Benefits are hard to prove.

  • Default rule determines outcome.

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Slide 31

  • Problems are possible (foreclosure).

  • Benefits are hard to prove.

  • Default rule determines outcome.

  • “Possibility” makes exclusion the default rule.

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Slide 32

  • Problems are possible (foreclosure).

  • Benefits are hard to prove.

  • Default rule determines outcome.

  • “Possibility” makes exclusion the default rule.

  • Result? Exclusion plus“dominance”= violation.

  • Déjà vu: Back to where we started.

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Slide 33

  • Problems are possible (foreclosure).

  • Benefits are hard to prove.

  • Default rule determines outcome.

  • “Possibility” makes exclusion the default rule.

  • Result? Exclusion plus“dominance”= violation.

  • Déjà vu: Back to where we started.

  • Beltone Electronics — only remaining dealer-based supplier.

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Slide 34

  • “Possibility” results basically all depend on contracts.

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Slide 35

  • “Possibility” results basically all depend on contracts.

  • Require a contract.

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Slide 36

  • “Possibility” results basically all depend on contracts.

  • Require a contract.

  • Require a showing of foreclosure.

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Slide 37

  • “Possibility” results basically all depend on contracts.

  • Require a contract.

  • Require a showing of foreclosure.

  • Then, and only then, do the trade-off.

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