Exclusive dealing refers to any agreement, written or otherwise, between a supplier or manufacturer and its customer-wholesaler or retailer-whereby the customer is restrained from dealing with any of the supplier’s competitors. Exclusive deals raise competition concerns as they may foreclose the market to existing and potential competitors. Such agreements may be prohibited under Section 17, Section 20 and Section 33 of the Act.
The term “exclusive dealing” includes all agreements that, directly or indirectly, lead to an exclusionary effect on competitors. If, for example, a supplier offers discounts based on the proportion of the wholesalers’ sales that come from that supplier (these are commonly known as fidelity or loyalty discounts), the wholesaler may have no incentive to source from other suppliers. This could lead to a de facto exclusive arrangement that forecloses the market to competitors.
Under certain circumstances, however, exclusive arrangements may have pro-competitive benefits in that they may promote non-price competition and improvement in quality of service. Exclusive arrangements could, for example, be necessary to eliminate free-rider problems. Free riding may occur when one distributor benefits from the promotional efforts of another distributor. This reduces the incentives for the distributor to invest in promotional activities, as he would not be able to reap all the benefits of his efforts. Exclusive arrangements can overcome this free-riding problem by retaining the incentives to invest, such that the pro-competitive benefits are realized. Exclusive dealing may also be beneficial where a supplier must undertake highly specific capital investments to meet the particular requirements of a customer. If the equipment cannot be used for any other purpose, the supplier bears the risk of having made a useless investment if the customer switches to another supplier. In the absence of exclusivity, the investment might not be undertaken.
In such cases where the arrangement leads to pro-competitve benefits such that it contributes to the improvement of production or distribution of goods and services or the promotion of technical and economic progress, the arrangement will not be prohibited under the Act. Temporary exclusive arrangements may also be permitted under Section 33 of the Act to allow a new entrant to penetrate the market.