Comments on: Section 2 Symposium: Josh Wright on An Evidence Based Approach to Exclusive Dealing and Loyalty Discounts

By: TRUTH ON THE MARKET » The EU Intel Decision, Error Costs, and What Happens in the US?

Thu, 17 Sep 2009 19:03:26 +0000

[...] relying on existing theory and evidence to inform our estimates. Here is what I wrote in my post during the Section 2 Symposium on this exact issue: The situation antitrust enforcers find themselves in with respect to exclusive dealing is not [...]

By: Howard P. Marvel

Howard P. Marvel — Wed, 06 May 2009 21:18:37 +0000

Herb, that’s one trusting franchisee. One would think that either the contract itself or the economics of the situation would provide protection for the franchisee. If the investment is in a business format, I’d be very surprised if exclusive dealing was not required, but more so if the exclusive dealing represented an antitrust problem. The free-rider problems in franchising, combined with the problems of ensuring the franchisor gets its split of the take from the franchise operations, suggest that exclusive dealing is crucial for franchising’s success. And since the franchisor is providing the format, the competition in the market is for good entrepreneur operators, rather than for outlets. I don’t see how a franchisor could lock up access to such folks.

I agree, however, that should the distributor prove to be locked in, the safe harbor should not be so safe. But the operative word is “prove.” That is, a safe harbor without a strong case that the relationship is equivalent to a long-duration contract.

By: Josh

Josh — Wed, 06 May 2009 18:05:12 +0000

Herb correctly notes that it is possible for anticompetitive harm to exist with short term contracts under conditions where the switching costs are high. Of course, it is also theoretically possible that contracts with foreclosure levels less than 30 percent could cause anticompetitive harm. The central point is this post is not that the rule would drive false positives and false negative to zero; but rather than it would move us closer to minimizing the social costs of both sets of errors. It is possible that we could do even better with more evidence on how and when the duration of contracts impacts consumer harm, but my assessment of the theory and evidence is that we are not there yet in terms of our empirical knowledge to support a liability rule based on the theoretical concern.

By: Herb Hovenkamp

Herb Hovenkamp — Wed, 06 May 2009 17:12:23 +0000

Both Josh and Howard advocate for a safe harbor or at least presumptive legality for exclusive dealing contracts whose duration is less than one year. As a basic premise I agree, but with some qualifications. A distribution contract is a contract, and breaching it presumably incurs penalties. As a result a short duration contract indicates that this particular penalty will not be a substantial factor to enforcement of exclusive dealing. Sometimes termination penalties are very high and sometimes they are practically nonexistent. Further, there are penalties other than contract termination. For example, a franchisee may have to make a significant investment in product-specific technology or intellectual property that it will be unable to use if it is terminated. In that case the cost of termination can be substantial even though the contract is nominally of short duration. If a franchisee has a 90-day termination clause but $10 million invested in a trade-dress-heavy facility that will have to be remodelled or torn down, that can be a bigger cost than the cost of the contract breach itself. In sum, rather than looking simply at contract duration we must look at the full range of switching costs that a dealer will incur at the price for violating an exclusive dealing provision.