Exclusive Dealing and Business Efficiency: Evidence from Industry Practice

Abstract

Exclusive dealing has been the subject of intense public policy debate. A central issue in this debate has been the relationship between exclusive dealing and business efficiency. Despite its importance, there has been a general lack of empirical evidence on business efficiency arguments. The existing evidence on exclusive dealing is limited almost entirely to legal case studies involving firms whose distribution practices have been challenged under antitrust law. In this article we use a new source of microlevel data to study the use of exclusive dealing in industrial markets, gathered through a survey of managers who were responsible for making the distribution decisions in their firms. Our central finding is that business efficiency factors play a significant role in firms' decisions regarding exclusive dealing. Specifically, we find evidence that firms are more likely to use exclusive dealing when there is a potential that other manufacturers can free ride on the services they provide. We also find that difficulties with evaluating distributors' adherence to assigned restrictions decrease the likelihood of using exclusive dealing in the first place. Finally, we also find that when manufacturers are concerned about the costs that exclusive dealing imposes on end customers, such arrangements are less likely.