Exclusive Dealing Arrangements Research Articles

On the profitability of interfirm bundling in oligopolies

AbstractThis paper examines the profitability of interfirm bundling among independent single‐good producers in a two‐dimensional Hotelling framework. We show that interfirm bundling tends to relax price competition by preventing consumers from mixing and matching (i.e., making it difficult to switch brands) and therefore is more profitable than separate sales, provided that firms are sufficiently symmetric. Hence, firms have mutual incentives to offer their products as a bundle or to make exclusive dealing arrangements. This result sheds new light on the competitive effect of bundling in oligopolies that have been neglected in the literature.

Section 2 Mangled: FTC v Qualcomm on the Duty to Deal, Price Squeezes, and Exclusive Dealing

Abstract Judge Koh handed down a sweeping opinion in May 2019 condemning as antitrust violations many of Qualcomm’s licensing practices related to its patented chips and standard-essential technology used in mobile devices. The district court opinion significantly expands the scope of liability for refusals to deal and for non-predatory pricing, further eroding the longstanding symmetrical approach to antitrust enforcement regardless of the kind of property involved. We find three glaring errors in the district court opinion. First, the court expands the exception to the general rule permitting refusals to deal, as laid out in Aspen Skiing, well beyond the outer boundary of Section 2 by inappropriately inferring a prior course of dealing and erroneously finding a willingness to sacrifice profits. Secondly, the district court accepted a price squeeze theory—characterized by the FTC as a ‘tax’ on OEMs transacting with Qualcomm’s rivals—directly contrary to the Supreme Court’s holding in linkLine. Thirdly, the court erroneously concluded that Qualcomm’s exclusive dealing arrangements with Apple violate the Sherman Act, despite a glaring failure by the FTC to prove substantial foreclosure, contrary to modern antitrust precedent and economic theory. The district court’s inappropriate extension of antitrust liability in three separate areas of well-settled antitrust doctrine is remarkable and threatens to upend important precedent that has successfully guided business conduct for many years. Further, the remedy transforms the role of antitrust courts from adjudicators to central planners, a role for which the Trinko Court expressly stated they are ill suited. The decision invites plaintiffs to use the Sherman Act to reach conduct that has been generally shielded from antitrust liability. That invitation is ill advised and should be rejected by the Ninth Circuit, and if necessary, the Supreme Court.

Section 2 Mangled: FTC v. Qualcomm on the Duty to Deal, Price Squeezes, and Exclusive Dealing

Judge Koh handed down a sweeping opinion in May 2019 condemning as antitrust violations many of Qualcomm’s business practices related to the royalty rates it charged to license its SEPs. The district court opinion significantly expands the scope of liability for refusals to deal and for non-predatory pricing behavior, further eroding the longstanding symmetrical approach to antitrust enforcement regardless of the kind of property involved. We find three glaring errors in the district court opinion. First, the court expands the exception to the general rule permitting refusals to deal, as laid out in Aspen Skiing, well beyond the outer boundary of Section 2 by applying it to contracts negotiated by Qualcomm over 20 years ago and by inferring the company was willing to sacrifice profits even in the face of evidence that the change in dealing was implemented to increase short-term profits. Second, the district court accepted a price squeeze theory—characterized by the FTC as a “tax” on OEMs transacting with Qualcomm’s rivals—directly contrary to the Supreme Court’s holding in linkLine. Third, the court erroneously concluded that Qualcomm’s exclusive dealing arrangements with Apple violate the Sherman Act, despite a glaring failure by the FTC to prove substantial foreclosure, contrary to modern antitrust precedent and economic theory, both of which make crystal clear that proof of substantial foreclosure is necessary to showing an anticompetitive effect from exclusive dealing. The district court’s inappropriate extension of antitrust liability in three separate areas of well-settled antitrust doctrine is remarkable and threatens to upend important precedent that has successfully guided business conduct for years. Further, the remedy—aside from putting the nation’s security at risk and potentially undermining U.S. leadership in 5G technology and standard-setting—transforms the role of antitrust courts from adjudicators to central planners, a role for which the Trinko Court expressly stated they are ill suited. The decision invites plaintiffs to use the Sherman Act to reach conduct that has been generally shielded from antitrust liability. That invitation is ill advised and should be rejected by the Ninth Circuit, and if necessary, the Supreme Court.

Tying, Exclusivity, and Standard-Essential Patents

When a technological standard is adopted, implementers must pay to license all “standard-essential” patents (SEPs)—those covering core features of the standard—although the particular price terms usually cannot negotiated beforehand. To allay implementers’ fear of being “held up,” SEP owners usually make commitments to offer licenses on “fair, reasonable, and nondiscriminatory” (FRAND) terms. Among other things, this acts as a contractual price control for SEP licenses—albeit an imprecise one that is subject to judicial interpretation. Aside from licenses, an SEP holder may further supply an important “collateral input”—one that is not subject to the FRAND pledge, but which implementers nevertheless require in order to market a viable product. For example, this might be a physical component of the final product. The SEP holder might tie its SEP rights to the collateral input. It might also engage exclusive dealing or related practices, such as a “loyalty discounting” arrangement that imposes larger royalties on implementers who buy the input from competing providers. Importantly, FRAND’s operation as a price control significantly alters the economic analysis: here the primary impetus for tying may be to circumvent the price control by shifting the desired overcharge to the tied good—a concern that does not arise when a seller has complete autonomy over its pricing (as is usually the case). The natural result may be to foreclose competitors’ input sales. Such restraints have received little attention in the FRAND literature, but they are an emerging concern for innovation and competition policy. They have recently been attacked in two high-profile complaints filed against Qualcomm—one by the Federal Trade Commission, and the other by Apple. Against this backdrop, this article provides a legal and economic evaluation of tying and exclusive dealing arrangements in FRAND licensing. Such practices may act to undermine the FRAND price control, potentially violating the SEP holder’s commitment. The case for antitrust intervention is harder to make, but in principle the arrangement could act to exclude actual or potential competition in the collateral input market, bringing it within antitrust’s reach. I conclude by offering several policy recommendations for how courts and standard setting organizations might address these tying and exclusivity arrangements.

Buyer-Induced Exclusive Dealing

Large retailers may exercise buyer power in their interactions with manufacturers. This article explores the use of exclusive dealing arrangements by a monopoly retailer when purchasing a differentiated product from competing manufacturers. Interactions among the firms are modeled as a bargaining game. When consumers' brand preferences are weak and/or when one brand is preferred by a significant majority of consumers, it is more profitable for the retailer to negotiate an exclusive dealing arrangement with one of the manufacturers than to distribute both products. Also, it is more profitable for the retailer to induce exclusive dealing if the manufacturer of the excluded brand has a lot of bargaining power when negotiating with the retailer. If buyer-induced exclusive dealing reduces the retail price of the exclusive brand in order to encourage “brand switching” by consumers who favor the excluded brand, the practice may increase consumer welfare and even total welfare.

Help Without Borders: How the Google Android Case Threatens to Derail the Limited Scope of the Obligation to Assist Competitors

The Google Android investigation concerns the conditions under which Google makes certain of its applications (“Google Apps,” e.g. Play, Maps etc.) and the Android operating system available to manufacturers of mobile devices and mobile operating systems (OEMs). Some of those terms and conditions place restrictions around Android and Google Apps raising complaints among market players and competition authorities. One should not be too quick to dismiss these concerns; Google possesses a prominent position in the market and its practices, no matter how innocuous when performed by smaller firms, can have far-reaching reverberations when performed by Google. But at the same time, appreciating Google's prominent position also means not overlooking Google’s coopetitive relationship with its partners/competitors on account of the development and distribution of Android and Google Apps, and Google’s own interests as another competitor in the market. Under coopetitive relationships, some restrictions may be necessary to ensure that all parties in the co-dependent relationship maintain their ability to compete on the merits. To ask that Google raise all restrictions (as desired by its competitors) would upset this balance, and competition law has traditionally been wary of prescribing market interactions as long as the competitive process remains intact.This article indeed suggests that, properly conceived, Google's restrictions not only serve its right to compete on the merits, which always serves as a backstop to what can be recognised as an offense or how far a remedy can go, but they do so in the context of Google already assisting competitors succeed in the market. To understand and evaluate this central point here, the article proceeds in three steps. First, it briefly introduces the Google case. Then it establishes what type of competition law offense Google might be engaging in. This is necessary in order to identify how Google relates to its partners and what these relationships translate into for the purposes of competition law analysis. The language of the European Commission and the ensuing legal literature suggest tying/bundling arrangements among Google Apps, and between Google Apps and Android, and also a requirement that OEMs that want to adopt Google Apps do not develop forked versions of Android. A different approach is suggested here, according to which the conditions that govern the availability of Google Apps should be treated as a potential refusal to supply (with Google Apps serving as the “golden nugget” to which OEMs seek access), the bundling of Google Apps together should be treated as a what can be described as coopetitive bundling, due to the multi-layered relationship Google maintains with rival application developers, and for the same reason the exclusive dealing arrangement as coopetitive exclusive dealing arrangement. Once the proper legal bases are found, the article turns to discussing the interface of coopetitive relationships and the right to compete on the merits. In that direction, it is argued that mandating access to Google Apps and unbundling the applications suite would amount to the creation of a positive obligation for Google to assist competitors beyond what the (already limited) refusal to supply doctrine envisages, and beyond the residual freedom to compete on the merits the tying and exclusive dealing doctrines allow, considering that the tying and exclusive dealing arrangements of this case are characterised by the novel element of generating benefits for competitors as well as for the company introducing the restrictions.This note does not deny the possibility of Google's wrongdoing. Nor does it deny that Google’s conduct is inconveniencing competitors. It does insist however on proper legal tests, which set boundaries that respect the fundamental principle of competition law that firms are there to compete, not to help each other beyond what they wish for themselves.

The Supreme Court Should Grant Certiorari in FTC v. McWane

Exclusive dealing is the last vestige of the pre-economic era of antitrust. And it shows. The Supreme Court’s decision in GTE Sylvania nearly 40 years ago was the turning point for the evolution of modern antitrust law in the United States because it made clear “that the analysis of economic effects provided the proper basis for evaluating conduct under the antitrust laws.” In the area of vertical restraints in particular, the critical lesson that has emerged from the economic revolution in antitrust law has been that such conduct must not be condemned without economic evidence of harm to competition. The Supreme Court should grant certiorari in FTC v. McWane because, unfortunately, it is a vivid demonstration of the fact that exclusive dealing law remains untouched by the intellectual revolution in antitrust doctrine since the Supreme Court’s decision in GTE Sylvania. The Federal Trade Commission’s analysis in FTC v. McWane, and thus the Eleventh Circuit opinion, are not only in significant tension with the modern antitrust approach to vertical restraints, they reject it altogether. McWane presents a unique and timely opportunity for the Supreme Court to bring exclusive dealing law in line with modern antitrust law and economic analysis, to recalibrate the doctrine to focus on harm to competition, and to provide guidance to lower courts with respect to the application of rule of reason analysis in cases involving exclusive dealing arrangements.

The Economic Lessons of Fisher Body - General Motors

The costs of using rigid, inherently imperfect, long-term contracts to solve potential holdup problems, and the corresponding flexibility advantages of vertical integration, are illustrated by the Fisher Body-General Motors case. The holdup of General Motors by Fisher Body is shown to have involved Fisher renegotiating its body supply contract with G.M. so that, contrary to the original understanding, G.M. made half of the required investments in new body plants. Under the unchanged cost-plus contract terms designed to provide Fisher with a return on its equity capital investments, the decline in Fisher Body's capital to sales ratio led to a substantial wealth transfer from G.M. to Fisher. G.M. was forced to accept this unfavorable contract adjustment because it desired co located body plants and was operating under a long-term exclusive dealing arrangement designed to protect Fisher Body's original G.M.-specific capacity investments. The contract adjustment demonstrates the importance of distinguishing between inefficient threatened holdup behavior and the efficient way it is in both transactors' interests to actually accomplish a holdup. Contrary to Ronald Coase's recent criticism, this analysis reconciles all the available evidence.

Exclusive Dealing, the Theory of the Firm, and Raising Rivals' Costs: Toward a New Synthesis

For several decades antitrust courts were extremely hostile to exclusive dealing agreements, banning such contracts, regardless of their benefits, whenever the manufacturer held a significant market share. The FTC went even further, banning such agreements whenever the manufacturer had a non-trivial share of its market. This article attributes the original hostility to exclusive dealing contracts to neoclassical price theory's technological theory of the firm and its derivative model of workable competition. According to price theory, firms existed to allocate resource and realize efficiencies of a technological nature that, by their nature, arose within the firm. At the same time, price theory identified no beneficial explanation for partial “contractual” integration. The result was the so-called “workable competition” model, which privileged “unilateral” “competition on the merits” over “concerted” “contractual integration, the latter of which was presumed to have market power origins. The article then recounts two responses to this hostility. The first response, from “within” price theory, came from the Chicago School, which argued that a firm with market power could only realize one monopoly profit, with the result that exclusive dealing contracts could not “enhance” the power that a firm otherwise possessed. Unlike, say, the Chicago School account of minimum resale price maintenance, this attack on conventional wisdom offered no affirmative wealth-creating reason that firms would adopt such agreements. Instead, Chicagoans simply inferred that such agreements produced benefits because they supposedly could not create harms. The second response — Transaction Cost Economics or TCE — sought to undermine price theory itself, or at least its conception of the firm and other non-standard contracts. Unlike the Chicago School, TCE offered to explain how exclusive dealing within and between firms produced benefits. In particular, TCE argued that complete and partial integration was a method of reducing or eliminating the costs of relying upon unbridled markets to conduct economic activity, particularly costs flowing from anticipated opportunism. Exclusive dealing, it was said, was no exception, and economists have identified several beneficial effects that such contracts can create. Unlike the Chicago School, TCE did not contend that exclusive dealing contracts could never reduce welfare. Still, TCE helped undermine the unmitigated hostility that once characterized antitrust's attitude toward exclusive dealing contracts. Raising Rivals'Costs (RRC) theory, it is shown, filled the void left by price theory's discredited lesson that exclusive dealing agreements were almost always harmful. That is, RRC offered a coherent and plausible theory regarding how such agreements may, in certain circumstances, raise the costs of rivals and facilitate the acquisition or protection of market power. The article ends by attempting to integrate the lessons of TCE and RRC theory with a view toward developing a standard for evaluating exclusive dealing arrangements that reflects the lessons of both paradigms, neither of which purports to exclude the other as a useful tool for interpreting such agreements. The essay critiques certain aspects of modern rule reason analysis as applied to exclusive dealing arrangements. Thus, it is argued, mere significant foreclosure of rivals from portions of the marketplace should not establish a prima facie case requiring the defendant to establish that the restraint produces benefits. Nor should courts allow plaintiffs to establish a prima facie case based simply upon a showing that such contracts result in prices that are higher than those that existed before the restraint. Moreover, if courts allow plaintiffs to establish a prima facie case based upon such showings, then there is no basis for “balancing” the benefits that the defendant proves against harms that are presumed once a plaintiff makes out a prima facie case, as such balancing depends upon the assumption that benefits coexist with harms, harms not logically presumed once the defendant shows that the restraint produces significant benefits. Instead, the essay concludes, plaintiffs seeking to establish a prima facie case should be required to establish the numerous conditions, including relevant input markets, output markets, and barriers to entry, that are necessary to any raising rivals' costs strategy. Once the plaintiff establishes such a case, the defendant should be allowed to establish that the arrangement produces benefits. Those who embrace a “purchaser welfare” approach to antitrust have not explained how courts should go about balancing the harms produced by such agreements against their benefits, given that such agreements might harm some consumers while benefitting others. At the same time, those who embrace a “social” or “total welfare” approach to antitrust may be content if courts declare “lawful” any such agreement that produces significant benefits.

Organizational Form in the Property-Liability Insurance Industry

INTRODUCTION Recent research has argued that alternative organizational forms will coexist in an industry because of differential relative advantages. (See, for example, Jensen and Meckling, 1976; Klein, Crawford, and Alchian, 1978; Fama and Jensen, 1983; Williamson, 1985.) The two important elements of organizational form are the ownership structure of the firm, and the degree to which the firm internalizes or outsources production, that is, the level of vertical integration. The property-liability insurance industry is characterized by firms that differ on both of these dimensions of organizational form. The range of ownership structures includes stock corporations, mutuals, and reciprocal organizations. Stockholder-owned insurers dominate the market, with 67.7 percent share of premiums written in 1994. Stock insurers controlled 55 percent of the personal lines market, which includes auto and homeowners insurance, but held a commanding lead in commercial lines, with a 79 percent share. Property-liability insurance firms also vary widely in the degree of vertical integration of the distribution system, with some firms using exclusive dealing arrangements and others contracting the sales function to independent agents who have ownership rights in the client list and who can represent a number of competing insurers. Independent agency insurers controlled 52 percent of the total market in 1994, and 71.8 percent of the commercial lines market.(1) The organizational form literature in property-liability insurance has largely treated ownership and distribution system choice separately. However, some overlap exists between the theory and empirical predictions across the ownership form and distribution system literature. For example, Mayers and Smith (1988) argue that stock insurers should be associated with a more complex mix of business than mutual insurers while Cummins and Weiss (1992), Regan and Tennyson (1996), and Regan (1997) argue that independent agency insurers should be preferred to exclusive dealers when complexity is higher. It is difficult to separate these effects empirically. An exception to treating these elements of organizational form as independent is Kim, Mayers, and Smith (1996), who argue that stock ownership and independent agency distribution are strategic complements, because independent agency is an effective device for minimizing agency costs that arise between owners and policyholders in a stock firm. Therefore, stockholder-owned insurers should choose independent agency distribution rather than exclusive dealing arrangements to minimize agency costs. While the authors of this article agree that independent agency distribution and stock ownership forms are likely to be strategic complements, the reasoning differs from that of Kim, Mayers, and Smith. An alternate explanation for the observed correlation between stock ownership form and independent agency distribution is that each of these elements offers advantages in certain lines of business and underwriting environments. In particular, the authors test the hypothesis that both stock ownership and independent agency distribution are more suited to complex lines of business and underwriting environments characterized by more risk than other combinations of ownership form and distribution system. Thus, rather than stockholder-owned firms choosing independent agency distribution, firms might first choose a business strategy, and then jointly choose ownership form and distribution system. The theory that supports this hypothesis is reviewed below. Several tests of the hypothesis are then presented. The direct correlation between ownership form and distribution system across lines of business is first measured using independence tests. Then, the authors compare the allocation of aggregate underwriting capacity to risky and complex lines of business between stock and non-stock insurers, and between independent agency and exclusive dealing insurers. …

Ausschließlichkeitsbindungen als Anreiz zum Handelsmarketing — Eine Untersuchung zur Gestaltung von Distributionssystemen

Exclusive dealing clauses are relevant in many distribution relationships. These clauses are often just part of an overall contractual arrangement between the parties in the distribution channel. It is argued that a producer is interested in an exclusive dealing arrangement not only because it allows him to build up entry barriers but also because it compels the dealer to concentrate marketing activities on its products and thereby to increase its selling volume. Consequently, the producer expects to profit from an exclusive dealing clause. On the other hand, the dealer bears costs because he renounces the right to sell competiting products. It is examined under which conditions the producer’s gains can compensate the dealer’s losses. Brand names as well as specific investments are identified as key elements for explaining the existence of exclusive dealing contracts.

Nonlinear Supply Contracts, Exclusive Dealing, and Equilibrium Market Foreclosure

We examine how the feasibility of both nonlinear pricing and exclusive dealing arrangements affect incentives for market foreclosure when two manufacturers contract with a retail monopolist. Surprisingly, we find that although market foreclosure equilibria exist, they are Pareto‐dominated (from each manufacturer's perspective) by all nonforeclosure equilibria. If one believes that Pareto‐dominated equilibria are unlikely to arise, then the difference between our results and those of Mathewson and Winter (1987), who do not allow for nonlinear pricing, suggests an ironic twist on the notion that quantity discounts and other kinds of nonlinear pricing can provide an additional way for a manufacturer to foreclose a rival. By providing a manufacturer with increased flexibility (beyond linear pricing) to extract a retailer's surplus, nonlinear pricing may instead have the effect of reducing the incidence of observed market foreclosure.

The Design and Duration of Contracts: Strategic and Efficiency Considerations

A vast body of economic theory is concerned with the way in which parties design contracts to align incentives and promote efficient exchange.' An alternate view, however, ascribes to contract design a more sinister purposethat of excluding or otherwise disadvantaging rival firms.2 Although the latter argument has tended to target a specific set of suspect practices such as tie-in and exclusive dealing arrangements, recent efforts have begun to associate strategic objectives with more conventional pricing and incentive terms in contracts, including such common provisions as multi-part pricing schedules3 and stipulated damages clauses.4 In the course of developing and applying the antitrust laws, the courts have analyzed the effects of various contractual provisions on competition. The resulting body of law recognizes that contracts have the potential to exclude competitors but also that exclusion can serve efficiency purposes.5 The broadening of exclusion claims to include the strategic use of common contractual designs, and the corresponding potential to challenge a widely used class of contractual arrangements on antitrust grounds, stand to complicate rule-of-reason analyses of anticompetitive exclusion and raise

The vertical restraints guidelines of the department of justice

In January, 1985, the Department of Justice issued Vertical Restraints Guidelines intended to clarify the legal status of vertical restraints, which had remained indefinite since the Supreme Court had declared in 1977 that the “rule of reason” was applicable to a large class of these restraints, and to outline an enforcement policy fair to all concerned and economically justified. The guidelines are mainly concerned with the two most controversial types of arrangement: territorial or customer restraints and exclusive dealing arrangements. Separately treated are tying arrangements, where the enforcement policy strictly follows lines indicated by a recent Supreme Court decision. A large part of the text of the guidelines is devoted to a detailed explanation of ways in which a given vertical restraint may be freed from the suspicion of anticompetitive effect. The analysis employs defective tests for anticompetitive impact and does not deal adequately with practices with both good and bad effects. Therefore, the guidelines do not appear to have accomplished their stated purpose.

Contracts, Conditions, and the Clayton Act: Causes of Action Available to a Dealer Injured by an Exclusive-Dealing Arrangement

Contracts, Conditions, and the Clayton Act: Causes of Action Available to a Dealer Injured by an Exclusive-Dealing Arrangement

Exclusive Dealing Arrangements under the Anti-Trust Laws

Exclusive Dealing Arrangements under the Anti-Trust Laws

The Effects of Requirements Contracts on Competition

ONE of the functions of the presidential commission which was recently appointed to study the scope and operation of the federal antitrust laws is to examine the economic situations under which legal action would be justified. The problem to which this paper is directed is to determine the circumstances under which the type of exclusive dealing arrangement known as the term requirements contract may be injurious to competition. An attempt will be made to construct an analytical framework within which any given set of requirements contracts may be fitted to determine its probable effect on competition in the market for the goods covered.