Most Read Contributor in Hong Kong, September 2016
Keywords: exclusive dealing
What is exclusive dealing?
Exclusive dealing is a vertical arrangement where one party is
obligated to deal exclusively with another party, to the exclusion
of their competitors.
Some exclusive dealing arrangements take the form of direct
contractual obligations, such as exclusive purchase/supply
obligations or quantity commitments, while others, such as loyalty
rebates, may have the de facto effect of exclusivity.
When does exclusive dealing amount to abuse?
Under the Second Conduct Rule, the Competition Commission
considers exclusive dealing likely to raise competition concerns if
the following conditions are met:
The party has a substantial degree of
market power and has imposed exclusivity obligations on many
It is likely that customers as a
whole will not derive benefit; and
A significant portion of the market
is foreclosed to competitors.
Other factors to be taken into consideration include:
The duration of exclusivity;
The market power of the other party
to the relationship; and
The prevalence of other exclusivity
arrangements on the market.
Actual anti-competitive effects on the market, such as an
increase in prices or the exit of as-efficient competitors from the
market, are strong indicators that an exclusivity arrangement
constitutes an abuse of substantial market power.
Conditional rebates are quantity-based rebates designed to
induce customer loyalty. In some cases conditional rebates may lead
to de facto exclusivity, when a customer deals exclusively
with a seller in order to reach the requisite purchase volume for
the rebate to kick in.
Volume rebates are generally pro-competitive when they are
relatable to economics of scale and cost savings. Incremental and
non-discriminatory discounts will rarely be considered
Conditional rebates are only likely to harm competition if they
are retroactive or individualised:
Retroactive rebates are
"all-or-nothing" rebates where customers are only
entitled to claim on their entire purchase order if they reach a
purchasing target during a period.
Individualised rebates are tailored
to the particular requirements of each customer and designed to
lock in customers across a spectrum of needs to purchase
exclusively from the seller.
Unlike incremental discounts, retroactive or individualised
rebates go further than passing on the seller's cost savings to
It's not all bad news
Exclusive dealing, like many vertical relationships, is common
and may be pro-competitive. It may:
Promote efficiency by creating
competition in the process of forming "teams";
Encourage distributors or retailers
to focus on marketing a product, promoting inter-brand competition;
Stimulate market demand and benefit
Next week we will take a look at refusals to deal.
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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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