Concepts in Industrial Organization: Exclusive Dealing Agreements and Resale Price Maintenance Agreements

Exclusive dealing agreements are a form of second-degree price discrimination, similar to requirements tie-in sales. In exclusive dealing agreements, a buyer agrees to purchase all of its requirements for some product or service from one suppliers. For instance, restaurant and fast food franchises often agree to purchase all of their supplies (cups, plates, food ingredients, etc.) from the parent company.

Courts currently apply the rule of reason to exclusive dealing agreements, which are often recognized to provide economic benefits to both buyers and sellers. Via exclusive dealing agreements, small retailers and businesses can be assured of having a steady supply of products and inputs, while suppliers can be assured of having buyers. Courts have looked at the market power of firms engaged in exclusive dealing agreements in order to judge such agreements' legitimacy; firms without substantial market power have tended to be allowed to engage in exclusive dealing agreements, whereas exclusive dealing agreements on the part of "dominant" firms have tended to be curtailed.

However, the criteria for market power and market dominance are vague. Any particular firm cannot at any time be sure if its exclusive dealing agreements are legal or not until the matter is taken to the courts.

Resale Price Maintenance Agreements

In resale price maintenance agreements, a manufacturer specifies either the maximum or the minimum price that retailers can charge for its product - typically the minimum price. Some manufacturers engage in this practice out of a desire to avoid price competition among different retailers; such competition would tend to drive down the price of the firm's product. These manufacturers think that, over time, this competition would cause the product's reputation for high quality to deteriorate. Resale price maintenance agreements are similar to mini-cartel agreements in that they seek to restrict price movements and limit competition among various retailers.

Initially, the courts declared that there existed "a right of a trader or manufacturer engaged in business freely to express his own independent discretion as to the parties with whom they will deal." That is, the courts held that people should be able to charge whatever price they wanted and set any terms they wanted. However, it was illegal for firms to attempt to police resale price maintenance agreements and actually use force to punish violators. Furthermore, manufacturers could not enforce their resale price maintenance agreements in a court of law.

The aforementioned approach was the legal status quo until 1937, when Congress passed the Miller-Tydings Act, one of the first "fair trade laws," which explicitly legalized resale price maintenance agreements and forbade the Federal Trade Commission and the Department of Justice from acting against them. The Miller-Tydings Act was repealed in 1976, after resale price maintenance agreements increasingly became seen as undesirable and difficult to enforce, especially since emerging large retail stores such as Wal-Mart would not agree to resale price maintenance.

Today, courts follow a rule of reason approach to resale price maintenance; the Supreme Court recently upheld this view in its Leegin Creative Leather Products vs. PSKS ruling. However, many free-market thinkers believe that the courts should go further and declare resale price maintenance agreements to be per se legal.

Source

Pongracic, Ivan. Lecture on Alternatives to Vertical Integration. Hillsdale College. Hillsdale, MI. November 27, 2007.

All lecture material is used with explicit permission.