Klein and Lerner, “The Expanded Economics of Free-Riding: How ...

ANTITRUST LAW JOURNAL[Vol. 74of distribution arrangements. For example, a partial exclusive dealingarrangement, where a manufacturer requires that sales of the manufacturer'sproduct comprise a certain percentage of the dealer's sales, say 75percent, prevents dealers from fully substituting lower cost alternatives tothe manufacturer's products yet leaves the option for dealers to carryother, highly demanded brands. If a consumer prefers an alternativebrand, the consumer will have the option to purchase that brand at thedealer under this arrangement. Partial exclusives, therefore, sometimesmay be more efficient arrangements for reducing potential dealer freeridingproblems, especially when the costs of full exclusive dealing interms of lost dealer sales are relatively high.Another way to reduce the dealer costs associated with exclusive dealingis to adopt a loyalty discount or volume rebate type of arrangement.In addition to reducing dealer costs that are ultimately borne by the manufacturer,loyalty discount arrangements more precisely focus dealer compensationon the desired additional dealer promotional efforts by providingdealers price discounts as a function of a dealer's incremental salesof a manufacturer's product. For example, if a manufacturer knows whatshare of a dealer's sales it is likely to achieve in the absence of the desiredadditional dealer promotion, the manufacturer may be able to design adealer promotional payments schedule that provides dealer wholesaleprice discounts for sales above that sales share. By compensating dealerswith price discounts based on the incremental sales induced by dealerpromotional efforts, the manufacturer is reducing the incentive of dealersto engage in the second type of free-riding. If the dealer switches itspromotional efforts to an alternative product, its compensation from themanufacturer for increased promotion will be substantially reduced. 67However, there also are economic disadvantages associated with thesealternative dealer compensation arrangements compared to full exclusivedealing contracts. First of all, as noted above, it may be difficult tospecify the particular partial exclusive sales share or the sales share whenpromotional discounts should begin. Individual dealers differ withregard to their sales levels, the quantity of promotion they will find intheir independent interests to supply, the effect of increased promotion67 See, for example, Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039, 1045 (8th Cir.2000), which involved purchase share discounts provided by Brunswick, the maker ofMerCruiser brand stern drive boat engines, to induce its dealers to promote its engines.Price discounts may be offered on a sliding scale for additional units purchased.Alternatively, discounts may go back to the first unit purchased, which implies low effectiveprices on the particular unit at which a purchase share necessary for a price discountis reached. These contracts are described as de facto or partial exclusive dealing inWillard Tom, David A. Balto & Neil W. Averitt, Anticompetitive Aspects of Market-ShareDiscounts and Other Incentives to Exclusive Dealing, 68 ANTITRUST L.J. 615 (2000).HeinOnline -- 74 Antitrust L.J. 500 2007