When are Exclusive Dealing Arrangements between Manufacturers and Suppliers Illegal?

Under the Sherman Act 1, as well as 3 of the Clayton Act, exclusive dealing agreements between suppliers and manufacturers can be anticompetitive vertical restraints on trade. In a typical exclusive dealing arrangement, a seller requires that a buyer of a product only purchase that product from that seller. These agreements are essentially requirements contracts. The primary concern is that manufacturers are foreclosed from entering the market due to these exclusive dealing relationships with established manufacturers. This is not generally considered a naked restraint on trade. As such, a court would evaluate such an agreement under the rule of reason and examine its pro-competitive justifications.

Note: Pro-competitive reasons for exclusive dealing contracts are that buyers may be assured of supply at a given price and sellers may be assured of customers. Further, if a buyer is required to buy one brand, it may help to promote that brand and enhance inter-brand competition. Also, exclusive dealing may lessen free riding on one brands promotional efforts.

Example: ABC Corp is a manufacture of widgets. ABC will only sell its widgets to sellers who agree to only purchase widgets from ABC. 123 Corp enters into one of these agreements. In this situation, a court would apply the rule of reason to determine if the agreement is anticompetitive and illegal. ABC Corp would need to demonstrate a pro-competitive justification for its policy.

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Discussion: How do you feel about the legality of exclusive dealing arrangements? Should these arrangements be subject to the rule of reason or per se illegal? Why? Do the pro-competitive justifications listed in the material note affect your opinion? Why or why not?

Practice Question: ABC Corp is the sole manufacturer of certain parts used in the assembly of touch screen devices. While it is possible to manufacture devices without using these parts, it is difficult to produce a product of similar quality. 123 Corp is the largest manufacturer of touch screen devices. 123 seeks an exclusive dealing relationship with ABC Corp to purchase all parts that ABC manufactures. 123 offers ABC a price well above its current price to secure this deal. Is there any problem with this proposed relationship?