Antitrust Exclusivity Agreements
Exclusive supply contracts prevent a supplier from selling inputs to another buyer. If a buyer holds a monopoly position and receives exclusive supply contracts, so a new entrant may not be able to obtain the inputs it needs to compete with the monopolist, contracts may be considered an exclusionary tactic in violation of Section 2 of the Sherman Act. For example, the FTC prevented a large drug manufacturer from enforcing 10-year exclusive supply agreements for a critical component in order to manufacture its drugs in exchange for suppliers receiving a percentage of the drug`s profits. The FTC noted that the drug manufacturer used exclusive supply agreements to prevent other drug manufacturers from entering the market by controlling access to the essential ingredient. The manufacturer of the drug was then able to increase the prices of his drug by more than 3,000%. A: Exclusive distribution agreements like this are generally allowed. Although the retailer is prevented from selling competing flat panels, it may be the type of product that requires a certain level of knowledge and service to be sold. For example, if the manufacturer invests in training the retailer`s sales staff on the operation and characteristics of the product, it can reasonably require the retailer to commit to selling only its monitor brand. This level of service benefits buyers of sophisticated electronic products. As long as there are enough outlets for consumers to buy your products elsewhere, antitrust laws are unlikely to interfere with this type of exclusive agreement. Finally, some lower courts that review other exclusivity agreements have suggested that it is a safe haven for agreements that collectively affect less than thirty to forty percent of existing customers or distribution. For example, the First Circuit noted that „[f] or exclusive trade, foreclosure levels are unlikely to matter if they are less than 30 or 40 percent.“ (62) Similarly, in Minnesota Mining & Manufacturing Co.c.
Appleton Papers Inc., the court concluded that „a foreclosure rate of at least 30 to 40 % must be established to justify a breach of antitrust laws“. (63) Exclusive decisions can benefit competition on the market by guaranteeing sources of supply or points of sale, reducing contractual costs or retaining dealers. As we have seen in the factsheets on transactions in the supply chain, exclusive decisions between manufacturers and suppliers or between manufacturers and distributors are generally legal because they improve competition between brands of different manufacturers (inter-brand competition). However, if the company that uses exclusive contracts is a monopolist, the focus is on whether these contracts hinder the efforts of new companies to enter the market or existing small companies to expand their presence. The monopolist could try to impede the entry or expansion of new competitors because this competition would undermine its market position. Antitrust laws condemn certain actions of a monopolist that prevent competitors from entering the market or prevent new products from reaching consumers. The risk of competitive harm caused by exclusive purchasing agreements increases with: (1) the duration of the contract; (2) the greatest number of points of sale or sources covered; and (3) the least points of sale or alternative sources are not covered. This chapter deals with cases of exclusivity arising from both section 2 of the Sherman Act and other legal provisions. In another important First Circuit decision in 1993, that court approved an exclusivity agreement that was challenged under Sections 1 and 2 of the Sherman Act. The agreement here included a seller`s obligation to sell their production only to a specific buyer: About twenty-five percent of Primary Care Physicians in New Hampshire agreed to sell their services to Healthsource and no other health care organization (HMO). .