March 15, 1999 ebr/jsw
Naked Exclusion:  Reply
By Eric B. Rasmusen, J. Mark Ramseyer,
and John Shepard Wiley Jr.*


 Published: American Economic Review, 90:310-311 (March 2000)
 
	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);
	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).
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