The FTC’s application of Section 5 authority to challenge exclusionary vertical restraints

Vertical practices can be either procompetitive or anticompetitive, depending on the circumstances

The antitrust division of the Department of Justice (DOJ), the Federal Trade Commission (FTC) and state attorneys general are responsible for enforcing nonmerger government antitrust issues. The DOJ has the exclusive authority to enforce the provisions of the Sherman Act, and the FTC has the authority to challenge “unfair methods of competition” under Section 5 of the FTC Act.

The language of Section 5 of the FTC Act is broader than that of Section 2 of the Sherman Act. Until recently, however, Section 5 of the FTC Act did not play a significant role in single-firm antitrust enforcement. Federal enforcement policy between the 1940s and the 1970s took an expansive view of liability under Section 2 of the Sherman Act in challenging anticompetitive single-firm conduct. Consequently, there was less need for the broader language of Section 5.

The vertical practices involved in these cases can have procompetitive or anticompetitive explanations depending on the particular facts and circumstances of each situation. Exclusive dealing—the practice the FTC alleged was anticompetitive in the cases involving Transitions Optical and McWane and Sigma—is an arrangement that prevents a distributor from selling another manufacturer’s products. Exclusive distributorship, which was the focus of the case involving Pool Corp., is an arrangement that prevents a manufacturer from selling its products through a different distributor.

A procompetitive logic for both these arrangements is to prevent free riding that would otherwise reduce competition. A free-riding problem for manufacturers is created if a dealer uses a manufacturer’s investment, such as salesperson training or advertising that brings customers to the dealer, to sell a rival manufacturer’s product. Unchecked, the effect of this conduct would be to reduce the procompetitive investment by the manufacturer. Similarly, a free-riding problem for dealers is created if a manufacturer allows other dealers to benefit from a dealer’s investments that increase the demand for the manufacturer’s products (e.g., brand promotion, customer service, etc.). These practices also can have an anticompetitive impact if the exclusivity restrictions are applied when these efficiency justifications are absent or weak.

Contributing Author

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Kıvanç Kırgız

Kıvanç Kırgız is a principal in Cornerstone Research’s Washington, DC, office. Dr. Kırgız has worked on many large-scale antitrust matters involving allegations of collusion,...

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Contributing Author

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Çağatay Koç

Çağatay Koç is a senior economist in the Washington, DC, office of Cornerstone Research. Dr. Koç has assessed competition issues across various industries and spent...

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