Espresso Exclusivity?

Cite this Article
Keith Sharfman, Espresso Exclusivity?, Truth on the Market (September 25, 2006),

Belvi Coffee and Tea Exchange cannot be serious. The firm is suing Starbucks for exclusive dealing in the Seattle and Bellevue, Washington real estate markets.

The suit alleges that Starbucks has leased real estate at above-market prices in exchange for commitments by the landlords to exclude other coffee shops from the building.

Let’s take Belvi’s allegations at face value and assume that Starbucks has a 73% share of the U.S. coffee shop industry, even though such a narrow product market definition seems implausible, given that Starbucks and other coffee shops compete for customers with many other types of shops, lounges, and restaurants. People buy coffee (and many of the other products that Starbucks sells) in all sorts of places besides coffee shops. Dunkin’ Donuts sells coffee and cake. So does McDonald’s. So does pretty much every diner and restaurant in the country.

But as I say, let’s take Belvi’s allegation of a 73% market share at face value. So what? The issue in this case is not whether Starbucks has monopoly or market power in the coffee shop market. That’s not in the least bit relevant. What matters is whether Starbucks has market power in real estate. And there’s not even an allegation of that here, much less any evidence.

Nothing stops Belvi from opening up as many shops as it wants to in any neighborhood where Starbucks is located, and if Starbucks charges too much people could always swing on over to Belvi. Surely it isn’t necessary for Belvi to be located in the very same building as Starbucks in order for Belvi to compete. (Has there ever been an antitrust case involving a retail industry in which the relevant geographic market is defined as a single building? I’m not aware of any.) Suppose that instead of leasing Starbucks owns the building. Would antitrust law require Starbucks to lease space to its competitor? That doesn’t seem very likely. A building isn’t an “essential facility” like a railroad track whose owner may be compelled to deal with a competitor. If outright ownership would entitle Starbucks to refuse to deal, why should an exclusive lease be treated any differently? It’s hard to see what would make an exclusive lease different from an outright sale.

Note the plausible procompetitive justification for the exclusivity that Starbucks obtains through these leases. Starbucks probably does lots of market research when deciding where to locate its stores. Why must Starbucks allow Belvi to free ride on that research?

If Starbucks had gotten an entire neighborhood to agree not to lease to other coffee shops, I could see Belvi’s point. But so long as Starbucks lacks the power and anyway has done nothing to prevent Belvi from locating next door, the case seems ludicrous and ought to be dismissed.