Review of Industrial Organization 16: 167–184, 2000.
© 2000 Kluwer Academic Publishers. Printed in the Netherlands.
Exclusive Dealing, Preferential Dealing, and
RICHARD J. GILBERT
Department of Economics, University of California, Berkeley, CA 94720, U.S.A.
Abstract. Several recent antitrust cases brought by the U.S. Department of Justice have challenged
exclusive dealing by ﬁrms with market power. This paper reviews the legal treatment of exclusive
dealing and analyzes the economic implications of contracts that penalize customers for trading with
a rival supplier. These contracts include arrangements that make it more costly for customers to trade
with a rival (preferential dealing) as well as contracts that prohibit such trades (exclusive dealing).
The analysis assumes that buyers and sellers negotiate efﬁciently, so the focus is on the implications
of contract terms for investment behavior (dynamic efﬁciency). When investment is limited to the
entrant, the optimal contract between a monopoly seller and a buyer imposes a socially excessive
penalty for trade with a rival. The paper contrasts the dynamic efﬁciency consequences of contractual
penalties and volume discounts. Both penalties and volume discounts reduce a customer’s gains from
trade with rival ﬁrms. However, in many circumstances, penalties harm dynamic efﬁciency because
they lower a rival ﬁrm’s marginal incentives to invest.
Exclusive dealing arrangements require a buyer to purchase products or services
for a period of time exclusively from one supplier. Exclusive dealing is not per
se unlawful under U.S. antitrust law. These arrangements can promote investment
by making demand and supply more predictable and by reducing free-riding by
rivals who may beneﬁt from a ﬁrm’s investments. Nonetheless, exclusive deal-
ing can raise prices and lower consumer welfare by foreclosing a market to rival
ﬁrms. U.S. courts have been critical of exclusive dealing arrangements and the U.S.
Department of Justice has challenged exclusive dealing conduct in several recent
Exclusivity can arise because parties agree to contractual obligations that im-
pose penalties for dealing with others. A take-or-pay contract, or a price that
depends on the seller’s share of a buyer’s purchases, has such a feature. After brieﬂy
reviewing U.S. Supreme Court decisions on cases involving exclusive dealing,
Section II of the paper describes several recent cases brought by the U.S. depart-
Russ Pittman, Ilya Segal and Carl Shapiro provided helpful comments. This paper is based in
part on Gilbert and Shapiro (1997).