Exclusive Dealing, Limiting outside Activity, and Conflict of Interest

Exclusive dealing is one of a number of non-price "vertical restraints" that have become the subject of considerable scrutiny and rethinking, both in the courts and in the academic literature [2; 8; 10; 17]. Because of its association with antitrust law, the emphasis of the exclusive dealing literature [3; 7; 13; 16; 21] has been on whether exclusive dealing can enhance or protect a firm's market power.' Exclusive dealing and related restrictions on agent activities, however, are far more widespread than can credibly be attributed to antitrust considerations or interfirm strategic behavior. The range of instances where "exclusive dealing" broadly construed applies is quite large, including the familiar manufacturer/retailer relationship as well as other situations where there may be a "conflict of interest." The decision to hire a worker to do a job or to have the job done by an independent contractor could be interpreted as the decision whether a firm wants its workers to "exclusively deal" their labor. The "exclusivity" question arises in less formal or familiar settings as well. Should one, for example, permit a babysitter to have friends visit, or should her attention be "exclusively" directed toward one's children? Should a university permit its faculty to engage in outside consulting or non-university sponsored research, or should it lay down rules restricting the time available for "outside activities" or the types of outside research that can be carried out? Antitrust courts and legal commentators over the past ten years, especially since Sylvania [4], have come to view non-price vertical restraints more benignly than in the past [2, 299-304; 15; 17; 18; 20]. Benign neglect, however, offers no help to a firm wondering whether to institute exclusive dealing. Not only may the costs and benefits of doing so be subtle, but the decision may be controversial among the affected parties. In the conventional "exclusive dealing" case, retailers may not want a major supplier to cut them off if they continue to sell another manufacturer's product, and will likely demand to be compensated for their lost business opportunities. Exclusive dealing may be viewed as the limiting version of a policy to limit outside activities by agents. The purpose of this paper is to set out a very general neoclassical choice framework to discover conditions in which exclusive dealing or limitations on outside activities to mitigate conflicts of interest can enhance the operating efficiency of a vertical relationship. A specific goal