On April 5, 2012, the U.S. DoJ published a rather interesting speech by the Deputy Assistant Attorney General of the U.S. DoJ, Antitrust Division, Fiona Scott-Morton, entitled “Contracts that Reference Rivals”.
The speech addresses one very specific and interesting aspect of vertical arrangements – namely when antitrust enforcement officials should scrutinize supply and other vertical contracts that reference and depend on information outside the buyer-seller relationship (e.g., competitor information):
“Consider first a contract between firms over the purchase of an input. Some contracts lay out a price per unit which the buyer must pay; others describe a quantity volume schedule open to all buyers, with one per-unit price for purchase of a limited number of units and a, typically lower, per-unit price for purchases of large numbers of units. I will call these standard contracts, and they are the benchmark I have in mind. By contrast, a contract between a buyer and a seller may refer to, and its terms may depend on, information outside the buyer-seller relationship: information from other transactions to which those same firms are party. Those references may be either explicit or implicit, and they can involve a host of factors, including price terms, non-price terms, terms pertaining to the buyer’s rivals, or terms pertaining to the seller’s rivals. I call these Contracts that Reference Rivals, or CRR.
An example of CRR is a purchase agreement containing a market share discount: the buyer will receive a discount on incremental units, or perhaps all purchased units, if it buys 90% or more of its needs from one seller. Note that the price the buyer pays on its purchases from one seller are linked to its purchases at rival sellers. Buying more than 10% of its needs from the rival sellers will increase the price paid in the contract.
Over the years, a number of investigations at the Antitrust Division have involved contracts that reference other transactions in the marketplace. Likewise, economists have studied many types of CRRs. The goal of this paper is to provide a brief survey of past and current CRR cases as well as the findings in the economic literature. The short preview of my conclusions is that the economics literature has identified many circumstances where CRRs have the potential to harm consumers and competition, particularly — but not always — when they involve firms with market power. CRRs have thus been, and will continue to be, the subject of antitrust scrutiny, both at the government and in private litigation.”
For the complete DoJ speech see:
Contracts that Reference Rivals
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