Do refusals to deal and exclusive dealing infringe competition law?

In general, any firm — even a monopolist — may freely choose its business partners. However, there may be limits on this freedom for a firm with market power. The key to identifying those limited situations when a firm with market power may infringe competition law by refusing to do business with other firms, is to focus on how the refusal to deal helps the monopolist maintain its monopoly or allows the monopolist to use its monopoly in one market to attempt to monopolize another market.

Refusal to deal stems from the liberty of enterprise. In the same way, that a firm can choose its business partners, it can also refuse to deal with certain firms. The concept goes further whereby a firm can renounce its own freedom and choose to deal with only one other firm, referred to as exclusive dealing. Both practices are very common in the business world and for good reason: they present firms with benefits which they could not attain otherwise.

One illustration of such benefits concerns the manufacturing sector. Specialization in the sales and marketing of a brand allows the reseller to aggressively promote the concerned products. Promotional efforts include offering special services or amenities that cost money (e.g. an attractive store, trained salespeople, long business hours, an inventory of products on hand, etc). Those efforts cost money and are offered before the product is sold. If the consumer can take a "free ride" on the valuable services offered by one retailer, and then buy the same product at a lower price from another retailer that does not offer high-cost amenities, such as a discount warehouse or online store, the full-service retailer may eventually stop offering the services, which can result in a loss both for the manufacturer and the consumer. Exclusive dealing between the full-service retailer and the supplier in such a case would prevent such an outcome.

While refusal to deal and exclusive dealing can justifiably emanate from the freedom of enterprise, there may be certain circumstances which can prove to be anticompetitive, when undertaken by monopolies or firms with market power. Section 46(2) of the Competition Act 2007 provides that such situations may be reviewed when the conduct “has the object or effect of preventing, restricting or distorting competition; or in any other way constitutes exploitation of the monopoly situation.”

Such an example whereby exclusive dealing can be anticompetitive when used by monopolies or firms with market power is where a manufacturer with market power is potentially using these types of arrangements to prevent smaller competitors from succeeding in the marketplace. For instance, exclusive contracts may be used to deny a competitor access to retailers or distributors without which the competitor cannot make enough sales to be viable.   The refusal to deal can be with customers or suppliers, with the effect of preventing them from dealing with a rival.In short, the widespread use of refusal to deal and exclusive dealing practices among businesses has well founded justifications in terms of free market economics and the associated pro-competitive benefits which they can bring to firms. However, when employed by firms with market power, the same practices can lead to anticompetitive outcomes, and damage the interests of rival firms and consumers.

This article forms part of a series of stories of Competition Commission.