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

2007]EXPANDED ECONOMICS OF FREE-RIDINGan increased independent economic incentive to more actively promotethe manufacturer's products.Although an undivided dealer loyalty rationale has been accepted bya number of courts as a procompetitive motivation for exclusive dealing,16 the rationale has been rejected in the economics literature. InDentsply,Judge Robinson accurately described the lack of an existing economicbasis for an undivided loyalty rationale for exclusive dealing bynoting that Howard Marvel, Dentsply's own economic expert, explicitlyrejected the possibility that exclusive dealing could increase dealer servicesin his article. 7 The court fully accepted Marvel's economic reasoning,concluding that the use of exclusive dealing to create dedicateddealers that have an increased incentive to supply desired promotionalservices is not a valid justification for exclusive dealing because dealershave incentives to provide services in order to compete for customers.' 8However, while this argument is correct for dealer supply of services withlarge inter-dealer demand effects (such as convenient parking or cleanstores), inter-dealer competition is an insufficient motivation for dealersto supply brand-specific promotion that has little or no inter-dealerdemand effects. Our analysis provides an economic basis for the commonsense,but previously unproven, proposition that exclusive dealingincreases independent dealer incentives to more actively promote a manufacturer'sproduct in these circumstances by creating undivided loyalty.All three types of potential dealer failures to meet manufacturerexpectations with regard to the supply of desired brand-specific promotioncan usefully be labeled as dealer free-riding. Dealers receive manufacturercompensation in the form of manufacturer-provided investmentsor monetary payments and then do not supply the increasedpromotion of the manufacturer's products for which they have beencompensated. Unfortunately, current antitrust economics only recognizesthe first type of dealer free-riding on manufacturer investments.This implies too narrow a view of the potential procompetitive purposesserved by exclusive dealing and, as illustrated by Dentsply, leads to anunnecessarily restricted search for manufacturer investments that dealerscan free-ride upon in order to justify exclusive dealing. Our analysisdemonstrates that exclusive dealing may more generally serve the procompetitivepurpose of preventing dealer free-riding on a manufacturer'scompensation arrangement for increased brand-specific dealerpromotion in circumstances where the manufacturer has not made "free-16 See, e.g., infra notes 75, 79, and 80.'7 Dentsply, 277 F. Supp. 2d at 441 (referring to Marvel, supra note 13).18 Id.HeinOnline -- 74 Antitrust L.J. 479 2007