Most Read Contributor in Hong Kong, September 2016
Keywords: competition, Hong Kong, vertical
WHAT ARE EXCLUSIVE ARRANGEMENTS?
Exclusive arrangements are a type of vertical arrangement,
whereby one party imposes restrictions on the other's ability
to choose with whom, in what or where it deals. It is a common
business practice and can take many forms. Often, it requires a
buyer (whether a reseller or end-user) to deal exclusively with a
seller. In most cases it will not harm competition.
For example, a manufacturer may agree to supply a distributor
provided it agrees not to carry the products of the
manufacturer's competitors. It can also occur between sellers
and consumers such as when consumer agrees to purchase all its
requirements of a particular product from a single supplier. It can
also involve a seller dealing exclusively with a single buyer.
Both the First Conduct Rule and Second Conduct Rule can apply to
exclusive arrangements. The Second Conduct Rule is only triggered
where one of the parties to the exclusive arrangement has market
WHY DEAL EXCLUSIVELY?
Exclusivity may be used by a manufacturer with market power to
prevent smaller competitors from succeeding in the market place.
For example, by denying a competitor access to retailers without
which it cannot make sufficient sales to compete effectively. It
can also be used by manufacturers to reduce competition between
them. For instance, where exclusive supply contracts between
manufacturers and their customers operate like a customer
allocation agreement so that the two manufacturers do not need to
compete for each other's customers.
WHAT HARM ARISES FROM EXCLUSIVE ARRANGEMENTS?
The main concern with exclusivity is a market
"foreclosure" effect. Foreclosure concerns arise because
exclusive arrangements by their nature "tie up" certain
distributors or suppliers in a manner that precludes other
competitors in the market from dealing with those parties. This
raises barriers to entry which makes it easier for existing firms
to exploit whatever power they have but difficult for existing
competitors to compete effectively or potential competitors to
entering a market.
The risk of foreclosure is likely heightened where:
Size of the party:
One of the parties has market power, which increases the likelihood
a larger share of the market will be foreclosed;
Network effect: A
large part of the market is tied up in other exclusive arrangements
(creating a "network effect" of exclusivity
exclusivity: The duration of exclusivity is unjustifiably
IT'S NOT ALL BAD NEWS
Notwithstanding the above, an exclusivity arrangement can also
be pro-competitive and beneficial, for example if it:
Encourages a distributor to promote
and market the manufacturer's brand more vigorously and to
offer extra services such as fast warranty service or after-sales
Provides retailers with assured
supplies which can allow for longer-term planning and
Encourages manufacturers to help
dealers by providing services or information benefitting consumers;
Provides a manufacturer with a
reliable and steady outlet of supply enabling it to make
investments to increase efficiency.
Whether an exclusive arrangement is likely to be justifiable on
efficiency grounds requires careful consideration and must be
analysed on a case by case analysis.
Next week, we will take a look at selective distribution
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This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Please also read the JSM legal publications
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As mentioned in our previous alert in this series, the Hong Kong Competition Commission's investigative process begins with an Initial Assessment to screen suitable cases for further investigation or other action.
The investigative process begins by the Hong Kong Competition Commission (the "Commission") identifying a potential contravention of a competition rule.
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