Competitive Effects of Exclusive Arrangements: Theory and Evidence

Economists Justin Coombs, Neha Georgie, and Verdi Choo [1] have co-authored a paper, commissioned by Grab Southeast Asia, exploring the competitive effects of exclusive arrangements.

The views expressed in this paper are the sole responsibility of the author and cannot be attributed to Compass Lexecon, Grab, or any other parties.

An overview

Exclusive arrangements can cause harm, but can also benefit consumers. In this paper, the authors (i) summarise the theoretical competitive effects of exclusive arrangements, and (ii) assess the practical approaches that competition authorities have taken to balance the potential harms and benefits of the practice in their guidelines and in case precedents.

Exclusive arrangements are common across the world, spanning industries as diverse as food and beverage, transportation, and utilities. [2] Widely cited economic studies have looked at this practice in particular industries, like beer, going back as far as the 1990s. [3] These studies have found that while exclusive arrangements can be harmful, leading to the exclusion of competitors, they may also promote competition by encouraging investment and fostering inter-brand competition, creating benefits for consumers.

More recently, many digital platforms have also relied on exclusive arrangements as a competitive strategy. Exclusive arrangements in this sector have drawn the scrutiny of competition authorities, particularly as economies of scale and network effects that are characteristic of digital platforms amplify the competitive effects of exclusivity.

This paper is organised as follows. Section 2 explains that exclusive arrangements are a common commercial practice in traditional markets and digital platforms. Section 3 explains that exclusive arrangements may cause harm, but can also benefit consumers. While the practice can foreclose competitors, it can also promote competition by (i) fostering differentiation and competition between platforms for exclusivity, (ii) encouraging investment by preventing competitors from free-riding, and (iii) providing entrant platforms with an avenue to enter new markets. Competition authorities have therefore generally not taken the view that exclusive arrangements are anticompetitive per se. Instead, they use a case-by-case effects-based approach to determine the overall effect of exclusive arrangements in a particular market.

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