An Evidence-Based Approach to Exclusive Dealing and Loyalty Discounts

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Joshua Wright, Jul 12, 2009

The primary anticompetitive concern with exclusive dealing contracts is that a monopolist might utilize exclusivity to fortify its market position, raise rivals costs of distribution, and ultimately harm consumers. The unifying economic logic of these anticompetitive models of exclusivity is that the potential entrant (or current rival) could, absent the exclusive contracts, attract a sufficient mass of retailers to cover its fixed costs of entry, but that the monopolist’s contracts with retailers prevent the potential entrant from doing so. However, the exclusionary equilibrium in these models is relatively fragile, and the models often generate multiple equilibria in which buyers reject exclusivity arrangements. At a recent set of hearings on antitrust analysis of exclusive dealing contracts, a sensible consensus view emerged that a necessary condition for anticompetitive harm in an exclusive dealing or de facto exclusive contract is that the contract deprives rivals of the opportunity to compete. These contracts, including market-share discounts and “loyalty discounts,” can harm competition when they deprive rivals of an entrenched firm from accessing distribution sufficient to achieve a minimum efficient scale. The recently-withdrawn Section 2 Report reflects this consensus… The article is an adaption of a posting originally presented in a Section 2 Symposium on the blog site, T

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