Truth on the Market

Howard P. Marvel is Professor of Economics in the Department of Economics and Professor of Law in the Moritz College of Law, both at The Ohio State University.

Exclusive dealing prevents the bait-and-switch behavior by dealers who convert customers drawn by one brand to the products of its rivals. Despite the red flag of “exclusive” in its title, the practice is ordinarily uncontroversial, indeed innocuous. Automobile manufacturers often pay incentives to encourage dealers to deal exclusively in their vehicles. Business format franchising ensures that large swathes of distribution are exclusive. And when exclusive dealing is denied to suppliers, the results can be catastrophic, as when the FTC massacred those manufacturers of hearing instruments that relied on exclusive dealers. The FTC sued five such firms for exclusive dealing, four of which agreed to drop it, and promptly died.

When does exclusive dealing represent a problem? When distributors that sign exclusive dealing arrangements are the only way for rival suppliers to get to market.  Thus, the Section 2 Report says that the analysis of exclusive dealing begins with a determination “whether the arrangement has the potential to harm competition and consumers. In situations where competitive harm is implausible-for instance, where other efficient distribution methods are available in sufficient size and number to rivals-courts appropriately uphold the arrangement.” (at 140)

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Howard P. Marvel is Professor of Economics in the Department of Economics and Professor of Law in the Moritz College of Law, both at The Ohio State University.

In the wake of Bork and Posner, and Baxter and the Reagan Revolution, a consensus emerged that big could be bad, but the harm that dominant firms could do needed to be demonstrated, not simply assumed in consequence of their sheer size. Moreover, the demonstration required harm to competition. The consensus held through the Clinton Administration, buoyed by the talented economists that it attracted. The Section 2 Report is controversial in drawing lines about where harm to competition begins, but it is not hard to imagine all sides of the debate agreeing with this from the report: “Competition is ill-served by insisting that firms pull their competitive punches so as to avoid the degree of marketplace success that gives them monopoly power or by demanding that winning firms, once they achieve such power, ‘lie down and play dead.’ ” (Report, p.8)

Or at least it was not difficult to limit the ground rules under which the debate would take place. But times have changed. We now worry not just about whether dominant firms abuse their positions.  Add the worry that they are too big to fail. Nobody appears concerned about GM preying upon its rivals, or even whether its new owners-you, me and the UAW-might be tempted to run the company in an anticompetitive fashion backed by Federal power. But we might have preferred to see Chevy, Cadillac, Saturn, and the rest fold asynchronously, permitting us to stand on the sidelines as the calamity proceeded slowly enough to allow each succeeding failure to be digested separately.  Who could break up the behemoths into little pieces? Calling Senator Sherman. Continue Reading…