Exclusive Dealing

WHAT IS EXCLUSIVE DEALING?

Exclusive dealing is a vertical arrangement where one party is obligated to deal exclusively with another party, to the exclusion of their competitors.

Some exclusive dealing arrangements take the  form of direct contractual obligations, such as exclusive purchase/supply obligations or quantity commitments, while others, such as loyalty rebates, may have the de facto effect of exclusivity.

WHEN DOES EXCLUSIVE DEALING AMOUNT TO ABUSE? 

Under the Second Conduct Rule, the Competition Commission considers exclusive dealing likely to raise competition concerns if the following conditions are met:

  1. The party has a substantial degree of market power and has imposed exclusivity obligations on many customers;
  2. It is likely that customers as a whole will not derive benefit; and
  3. A significant portion of the market is foreclosed to competitors.

Other factors to be taken into consideration include:

  • The duration of exclusivity;
  • The market power of the other party to the relationship; and
  • The prevalence of other exclusivity arrangements on the market.

Actual anti-competitive effects on the market, such as an increase in prices or the exit of as-efficient competitors from the market, are strong indicators that an exclusivity arrangement constitutes an abuse of substantial market power.

CONDITIONAL REBATES

Conditional rebates are quantity-based rebates designed to induce customer loyalty. In some cases conditional rebates may lead to de facto exclusivity, when a customer deals exclusively with a seller in order to reach the requisite purchase volume for the rebate to kick in.

Volume rebates are generally pro-competitive when they are relatable to economics of scale and cost savings. Incremental and non-discriminatory discounts will rarely be considered anti-competitive.

Conditional rebates are only likely to harm competition if they are retroactive or individualised:

  • Retroactive rebates are “all-or-nothing” rebates where customers are only entitled to claim on their entire purchase order if they reach a purchasing target during a period.
  • Individualised rebates are tailored to the particular requirements of each customer and designed to lock in customers across a spectrum of needs to purchase exclusively from the seller.

Unlike incremental discounts, retroactive or individualised rebates go further than passing on the seller’s cost savings to the customer.

IT'S NOT ALL BAD NEWS

Exclusive dealing, like many vertical relationships, is common and may be pro-competitive. It may:

  • Promote efficiency by creating competition in the process of forming “teams”;
  • Encourage distributors or retailers to focus on marketing a product, promoting inter-brand competition; and
  • Stimulate market demand and benefit consumers.

Next Week

Next week we will take a look at refusals to deal.