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

Exclusive Dealing 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.