Definition of an Exclusive Dealing Agreement

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Definition of an Exclusive Dealing Agreement
Exclusive dealing arrangements. (firma contract 20309 image by pablo from Fotolia.com)

An exclusive dealing agreement is a contract under which a buyer promises to buy one or more products exclusively from a particular seller. Exclusive dealing agreements generally violate United States antitrust laws.

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Legality

Exclusive dealing agreements are not per se illegal. Consideration is given to whether the agreement forecloses competition from entering the market. When determining whether an agreement violates antitrust law, courts review the particular type of business and whether the agreement restricts or promotes competition, the reason the agreement was made and the purpose sought by imposing the agreement.

Foreclosing Competition

Foreclosing competition is establishing a barrier for competition to enter a market. If a supplier has contracts with area distributors to only sell his products, distributors would be unable to work with the second supplier because of the exclusive dealing agreement with the first supplier. The second supplier is said to be foreclosed from the market.

Guarantee

A benefit of exclusive dealing agreements is that both the buyer always knows that it will have a supplier, and the supplier always knows that it will have a buyer. This benefit is greater for smaller buyers who are unable to purchase the large volume that their larger competitors may be able to purchase. It also allows a supplier to know how much to produce, minimising wasted resources.

Raise Rival's Cost

For suppliers who have competitors, exclusive dealing agreements may raise competitor prices. By forcing competitors to go elsewhere for distributors or buyers, increasing the cost of transportation, marketing and other costs of supply, the exclusive dealing agreement of one supplier could raise the cost its competitor faces.

Facilitating Cartels

Exclusive dealing agreements may also facilitate collusion by allowing producers or sellers to only deal with certain distributors or buyers. Buyers are unable to force sellers to compete with each other to lower the price that they have to pay.

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