Academic

Hovenkamp on Exclusive Dealing & Single-Product Discounting

By Lawrence Solum

Herbert J. Hovenkamp (University of Iowa - College of Law) has posted Exclusive Dealing: Single-Product Discounting, Slotting Allowances, and Related Practices on SSRN. Here is the abstract:

A firm's discounting policies over a single product raise exclusive dealing concerns in two situations. First, the firm may offer quantity discounts whose effect is to induce customers to take most of their requirements for a given product from the defendant. In addition, a firm may employ ?slotting? fees or similar allowances paid by manufacturers to retailers, with the possible result that rivals have difficulty obtaining access to shelf space.

Most quantity discount programs are undoubtedly designed to reflect the reduced costs of larger transactions. But suppose that a discounting program is clearly in excess of anything justified by significant savings. For example, suppose that the program gives incremental discounts stretching up to very large volumes and permits the aggregation of all purchases over a lengthy period, say one year. If exclusive dealing under equivalent structural conditions and subject to equivalent defenses were lawful, the discount arrangement should be lawful as well. But the competitive impact must in fact be less because any equally efficient rival can take the customer by bidding a better price and even compensating the customer for the loss of the discount from the defendant.

Some discounts take the form of upfront payments from producers to grocers or other retailers for access to the retailer's shelf space. For example, a grocer may wish to allocate scarce display space to only two of the three major brands of prepared baby food. These allowances are generally paid to retailers in order to induce them to carry and display a product whose prospects are uncertain to the retailer. The special characteristic of the slotting allowance that gives it this risk-transferring property is that it is a discount that diminishes as the volume of goods sold increases, effectively making the supplier share in the risk that a product will not succeed at retail.

Challenges to above cost discounting, where the engine of exclusion is price, must meet more severe structural requirements than exclusive dealing. Indeed, predatory pricing is a ?monopolization? offense requiring significant market shares in at least the 60-70% range, and it would be perverse to assess stricter structural requirements in cases involving below cost pricing than in those challenging prices that are above cost.

Full post as published by Legal Theory Blog on March 30, 2011 (boomark / email).