Our one-page reply to Whinston and Siegal's forthcoming AER article correcting and elaborating our 1991 AER article.exclusion, tying, anti-trust,exclusive dealing

Eric Rasmusen

J. Mark Ramseyer

John Wiley

English

Research Papers in Economics

1
March 15, 1999 ebr/jsw
Naked Exclusion:  Reply
By Eric B. Rasmusen, J. Mark Ramseyer,
and John Shepard Wiley Jr.*
We are grateful to Professors Segal and Whinston for improving our analysis.  We are
pleased they confirm our two main conclusions.  The first is that normally a firm cannot use
contracts with its customers or suppliers inefficiently to exclude a rival from competition, because
the high price of these contracts will make this strategy unprofitable.  This is an old point, well
summarized in Robert Bork's book.  Second, and in contrast, exclusionary contracts can be
profitable, effective, and socially inefficient -- under certain limited conditions.  One condition is
that firms in the industry must be able to operate only at or above some minimum efficient scale.
Another condition is that the victims -- customers or suppliers -- must expect that the
exclusionary tactic will succeed, and must be unable to coordinate their actions to defeat the
tactic.  Cf. Innes and Sexton (1994).  An excluding firm in this situation can buy naked exclusion
affordably because it can scare victims into selling cheaply; no single victim can stop the
exclusion by itself, so no single victim has any bargaining power.  At a theoretical limit, the
excluding firm can gain the exclusionary rights for free.
This striking result has implications for antitrust policy by suggesting that naked
exclusion is, in theory, a potentially viable threat to efficient competition.  Also striking from an
antitrust perspective, however, is the lack of fit between this theory and the cases in which the
United States Supreme Court has forged the law most relevant to exclusionary conduct.  A simple
legal label for contracts of naked exclusion is "exclusive dealing":  "You agree to deal only with
me, and not with my competitors."  In 1984, the Supreme Court wrote in Jefferson Parish that
reigning law flows from its decisions in Standard Stations and Tampa Electric in 1949 and 1961.
[1]  The facts of Jefferson, Standard, and Tampa, however, clearly violate the assumptions of  the
naked exclusion theory. [2]
Two important conclusions follow.  We cannot establish whether this kind of naked
exclusion ever really happens by looking at the three legally most relevant cases.  The theory
awaits other empirical testing.  And second, naked exclusion - if it ever really occurs - cannot be
the only explanation for exclusive dealing.  Rather, exclusive dealing "often" serves legitimate
business purposes, as Judge (now Justice) Breyer has written.  [3]  The theory at hand thus does
not support outlawing exclusive dealing on a per se or summary basis.  If a legal prohibition is
justified at all, any sensible legal test would have to be far more discriminating.  Lawyers and
judges who might seek to translate this theory into practice, please take note.
References
Bork, Robert, The Antitrust Paradox:  A Policy At War With Itself, New York:  Basic Books,
1978, New Intro. 1993.
Innes, R., and Sexton, R.J., "Strategic Buyers and Exclusionary Contracts,"  American Economic
Review, 1994, 84, 566-84.
Wiley, John Shepard, Jr., "Exclusionary Agreements," The New Palgrave Dictionary of
Economics and the Law, 1998, volume 2, 110-116.
Notes
*   Copr. 1999.
EBR, Indiana University, Kelley School of Business, Room 450, 1309 East 10th St.,
Bloomington, IN 47405-1701, erasmuse@indiana.edu, Php.Indiana.edu/~erasmuse; (812) 855-
9219 (voice), (812) 855-3354 (fax);2
JMR, Harvard Law School, Cambridge, MA 02138, mark_ramseyer@law.uchicago.edu,
(773) 702-7311 (voice), (773) 702-0730 (fax);
JSW, UCLA Law School, Los Angeles CA 90095-1476, wiley@law.ucla.edu, (310) 825-
3072 (voice), (310) 206-6489 (fax).
1.  Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 7, 30 n.51 (1984) (citing
Standard Oil Co. v. United States (Standard Stations), 337 U.S. 293 (1949), and Tampa Electric
Co. v. Nashville Coal Co., 365 U.S. 320 (1961)).  Wiley (1998) discusses these three cases.
2.  See Naked Exclusion:  Reply - Working Paper, by Eric B. Rasmusen, J. Mark Ramseyer, and
John Shepard Wiley Jr. (1998), found at
www.bus.indiana.edu/~erasmuse/@Articles/Published/98.AER.exclud.txt.
3.  Interface Group, Inc v. Massachusetts Port Authority, 816 F.2d 9, 11 (1st Cir. 1987).

Exclusionary Agreements,&quot; The New Palgrave

Strategic Buyers and Exclusionary Contracts,&quot;

The Antitrust Paradox: A Policy At War With Itself,

Naked Exclusion: A Reply

http://128.118.178.162/eps/io/papers/9907/9907001.pdf

Naked Exclusion: A Reply

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