About exclusive dealing
Exclusive dealing happens when one business trading with another business puts conditions on the other’s freedom to choose:
- who it does business with
- what business it does
- where it does business.
For example, a supplier refuses to supply or refuses to give a particular price or discount, unless the purchaser agrees:
- to buy products or services from an unrelated business, known as third line forcing
- to buy all its range of products, even if the customer only wants to buy one, known as full line forcing
- not to buy or resell products or services from the supplier’s competitors
- not to resell the supplier’s products or services in certain areas, or to certain customers.
When a purchaser places restrictions on a supplier, this is also exclusive dealing.
For example, a purchaser refuses to buy from a supplier unless the supplier agrees not to supply the purchaser’s competitors.
When exclusive dealing is allowed
Exclusive dealing is common in business arrangements. Often, it is legal because it doesn't
substantially lessen competition.
Example 1 of exclusive dealing that isn't illegal
An independent electronics store decides it will only buy from suppliers that agree not to supply its competitors. Because there are many other retailers and suppliers in the market, competition isn’t affected.
While this is exclusive dealing, it isn’t illegal because it won't substantially lessen competition. There are many other retailers and suppliers in the market.
Example 2 of exclusive dealing that isn't illegal
An office supplies retailer usually buys pencils from Business A and Business B. They are 2 of many available pencil suppliers. Business A tells the retailer it will only supply pencils if the retailer stops buying from Business B. The retailer stops buying pencils from Business B.
Business A’s behaviour is exclusive dealing. However, it isn’t illegal, because it won’t substantially lessen competition. There are many other pencil suppliers in the market.
When exclusive dealing is illegal
Exclusive dealing is illegal when it has the purpose, effect or likely effect of substantially lessening competition.
This is more likely when:
- the product or service can’t be bought elsewhere
- the business setting the conditions is powerful.
For example, a business tries to stop another business from competing by telling its supplier not to sell a competitor something essential that the competitor can’t buy elsewhere. This can have both the purpose and effect of
substantially lessening competition.