Author(s)
Source
Yale Journal on Regulation, Vol. 23, No. 2, Summer 2006, pp. 169-208
Summary
This paper looks at how deals that change how products are promoted or displayed affect consumers.
Policy Relevance
Antitrust regulation of many common business practices for promoting products harms consumers; many such practices should be legal.
Main Points
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Product distribution involves contracts between manufacturers or producers and retailers as to how products are carried and promoted. Manufacturers pay for promotion, because the manufacturer gains more than the retailer if a consumer switches to his brand.
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Controversial practices include:
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Payments for shelf space or time, such as “slotting allowances” by grocery stores or payments for radio airplay.
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Discounts and rebates, such as a 30% discount for retailers that buy a producer’s full product line.
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Exclusive contracts that prevent retailer “free riding,” such as those used by Microsoft to promote Internet Explorer.
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Retailers might take up front payments for promoting a product, but promote a rival instead, “free riding”. How business use contracts to stop “free riding” depends on two factors:
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Consumer demand for variety.
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The type of price competition between retailers.
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For example, if consumer demand for variety is high, but prices vary little between retailers, businesses use discounts and exclusive contracts.
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Antitrust cases ignore the business reasoning behind these contracts. Because the contracts can result in lower prices and other benefits of competition that are passed on to consumers, antitrust decisions that limit these contracts often harm consumers.
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Contracts that run for terms of less than one year, or that cover less than 40% of a products’ distribution should have a safe harbor from antitrust prosecution and should be considered “per se” legal.